34 lines
2.1 KiB
Plaintext
34 lines
2.1 KiB
Plaintext
742 Part VI: Measuring and Trading Volatility
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implied volatility was a poor predictor of actual volatility for most of the time on these
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graphs. Moreover, implied volatility remained low at the right-hand side of the charts
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(January 2000) even though the stock doubled in the course of a month.
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The important thing to note from these figures is that they clearly show that
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implied volatility is really not a very good predictor of the actual volatility that is to
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follow. If it were, the difference line would hover near zero most of the time. Instead,
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it swings back and forth wildly, with implied volatility over- or underestimating actu
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al volatility by quite wide levels. Thus, the current estimates of volatility by traders
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(i.e., implied volatility) can actually be quite wrong.
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Conversely, one could also say that historical volatility is not a great predictor of
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volatility that is to follow, either, especially in the short term. No one really makes any
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claims that it is a good predictor, for historical volatility is merely a reflection of what
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has happened in the past. All we can say for sure is that implied and historical volatil
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ity tend to trade within a range.
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One thing that does stand out on these charts is that implied volatility seems to
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fluctuate less than actual volatility. That seems to be a natural function of the volatil
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ity predictive process. For example, when the market collapses, implied volatilities of
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options rise only modestly. This can be observed by again referring to Figure 36-4,
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the $0EX option example. The only shaded area on the graph occurred when the
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market had a rather sharp sell-off during October 1999. In previous years, when
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there had been even more severe market declines (October 1997 or August-October
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1998) $0EX actual volatility had briefly moved above implied volatility (this data for
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1997 and 1998 is shown in Figure 36-9). In other words, option traders and market
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makers are predicting volatility when they price options, and one tends to make a
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FIGURE 36-9.
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$OEX implied versus historical volatility, 1997-1998.
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Actual
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40
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30
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10
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0
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D J F M A
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-20 1997 1998 |