25 lines
1.8 KiB
Plaintext
25 lines
1.8 KiB
Plaintext
728 Part VI: Measuring and Trading Volatility
|
||
FIGURE 36-1.
|
||
A sample chart.
|
||
Buy at these points.
|
||
So, many traders observed this pattern and have become adherents of trying to
|
||
predict volatility. Notice that if one is able to isolate volatility, he doesn't care where
|
||
the stock price goes he is just concerned with buying volatility near the bottom of
|
||
the range and selling it when it gets back to the middle or high end of the range, or
|
||
vice versa. In real life, it is nearly impossible for a public customer to be able to iso
|
||
late volatility so specifically. He will have to pay some attention to the stock price, but
|
||
he still is able to establish positions in which the direction of the stock price is irrel
|
||
evant to the outcome of the position. This quality is appealing to many investors, who
|
||
have repeatedly found it difficult to predict stock prices. Moreover, an approach such
|
||
as this should work in both bull and bear markets. Thus, volatility trading appeals to
|
||
a great number of individuals. Just remember that, for you personally to operate a
|
||
strategy properly, you must find that it appeals to your own philosophy of trading.
|
||
Trying to use a strategy that you find uncomfortable will only lead to losses and frus
|
||
tration. So, if this somewhat neutral approach to option trading sounds interesting to
|
||
you, then read on.
|
||
DEFINITIONS OF VOLATILITY
|
||
Volatility is merely the term that is used to describe how fast a stock, future, or index
|
||
changes in price. When one speaks of volatility in connection with options, there are
|
||
two types of volatility that are important. The first is historical volatility, which is a
|
||
measure of how fast the underlying instrument has been changing in price. The other
|
||
is implied volatility, which is the option market's prediction of the volatility of the |