46 lines
1.7 KiB
Plaintext
46 lines
1.7 KiB
Plaintext
Chapter 28: Mathematical Applications
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TABLE 28-3.
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Distance weighting factors.
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465
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Option
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Distonce
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from
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Stock Price
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Distance
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Weighting Factor
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January 30
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January 35
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April 35
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April 40
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TABLE 28-4.
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Option's implied volatility.
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.091 (3/33)
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.061 (2/33)
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.061 (2/33)
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.212 (7 /33)
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.41
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.57
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.57
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.02
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Volume Distance Option's Implied
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Option Factor Factor Volotility
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January 30 .25 .41 .34
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January 35 .45 .57 .28
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April 35 .275 .57 .30
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April40 .025 .02 .38
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Implied = .25 x .41 x .34 + .45 x .57 x .28 + .275 x .57 x .30 + .025 x .02 x .38
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volatility. .25 x .41 + .45 x .57 + .275 x .57 + .025 x .02
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= .298
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ual option's implied volatilities. Rather, it is a composite figure that gives the most
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weight to the heavily traded, near-the-money options, and very little weight to the
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lightly-traded (5 contracts), deeply out-of-the-money April 40 call. This implied
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volatility is still a form of standard deviation, and can thus be used whenever a stan
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dard deviation volatility is called for.
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This method of computing volatility is quite accurate and proves to be sensitive
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to changes in the volatility of a stock. For example, as markets become bullish or
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bearish (generating large rallies or declines), most stocks will react in a volatile man
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ner as well. Option premiums expand rather quickly, and this method of implied
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volatility is able to pick up the change quickly. One last bit of fine-tuning needs to be
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done before the final volatility of the stock is arrived at. On a day-to-day basis, the
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implied volatility for a stock - especially one whose options are not too active may
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fluctuate more than the strategist would like. A smoothing effect can be obtained by |