37 lines
1.9 KiB
Plaintext
37 lines
1.9 KiB
Plaintext
736 Part VI: Measuring and Trading Volatility
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Once again, consider Figure 36-3. While it is difficult to discern from the graph
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alone, the 10th percentile of $OEX composite implied volatility, using all of the data
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points given, is 17%. The line that marks this level (the tenth percentile) is noted on
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the right side of the scatter diagram. It is quite easy to see that the LEAPS options
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rarely trade at that low volatility level.
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In Figure 36-3, the distance between the curved lines is much greater on the
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left side (i.e., for shorter-term options) than it is on the right side (for longer-term
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options). Thus, it's difficult for the longer-term options to register either an extreme
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ly high or extremely low implied volatility reading, when all of the options are con
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sidered. Consequently, LEAPS options will rarely appear "cheap" when one looks at
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their percentile of implied volatility, including all the short-term options, too:
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One might say that, if he were going to buy long-term options, he should look
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only at the size of the volatility range on the right side of the scatter diagram. Then,
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he could make his decision about whether the options are cheap or not by only com
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paring the current reading to past readings of long-term options. This line of think
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ing, though, is somewhat fallacious reasoning, for a couple of reasons: First, if one
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holds the option for any long period of time, the volatility range will widen out and
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there is a chance that implied volatility could drop substantially. Second, the long
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term volatility range might be so small that, even though the options are initially
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cheap, quick increase in implied volatility over several deciles might not translate into
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much of a gain in price in the short term.
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FIGURE 36-3. Implied volatilities of $OEX options over several
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years.
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50
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45
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40
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~ 35
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~ 30
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g 25 "O
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.91 20 C.
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E 15 -0th
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10
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5
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0
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0 10 20 30 40
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Time to Expiration (months) |