32 lines
1.9 KiB
Plaintext
32 lines
1.9 KiB
Plaintext
Chapter 39: Volatility Trading Techniques 837
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buying a straddle, ask the question, "Has this stock been able to move far
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enough, with great enough frequency, to make this straddle purchase prof
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itable?") Use histograms to ensure that the past distribution of stock prices
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is smooth, so that an aberrant, nonrepeatable move is not overly influenc
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ing the results.
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Each criterion from Step 1 would produce a different list of viable volatility
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trading candidates on any given day. If a particular candidate were to appear on more
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than one of the lists, it might be the best situation of all.
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TRADING THE VOLATILITY SKEW
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In the early part of this chapter, it was mentioned that there are two ways in which
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volatility predictions could be "wrong." The first was that implied volatility was out of
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line. The second is that individual options on the same underlying instrument have
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significantly different implied volatilities. This is called a volatility skew, and presents
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trading opportunities in its own right.
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DIFFERING IMPLIED VOLATILITIES ON THE SAME UNDERLYING SECURITY
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The implied volatility of an option is the volatility that one would have to use as input
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to the Black-Scholes model in order for the result of the model to be equal to the
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current market price of the option. Each option will thus have its own implied volatil
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ity. Generally, they will be fairly close to each other in value, although not exactly the
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same. However, in some cases, there will be large enough discrepancies between the
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individual implied volatilities to warrant the strategist's attention. It is this latter con
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dition of large discrepancies that will be addressed in this section.
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Example: XYZ is trading at 45. The following option prices exist, along with their
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implied volatilities:
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Actual Implied
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Option Price Volatility
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January 45 call 2.75 41%
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January 50 call 1.25 47%
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January 55 call 0.63 53%
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February 45 call 3.50 38%
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February 50 call 4.00 45% |