36 lines
2.7 KiB
Plaintext
36 lines
2.7 KiB
Plaintext
844 Part VI: Measuring and Trading VolatiRty
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tage of the volatility skew. The put backspread is best established when the overall
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level of implied volatility is in a low percentile. Finally, the call ratio spread has a
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great deal of risk to the upside ( and futures prices can fly to the upside quickly, espe
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cially if bad fundamental conditions develop, such as weather in the grain markets).
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The call ratio spread would best be used when implied volatilities are already in a
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high percentile.
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As a general comment, it should be noted that if the volatility skew disappears
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while the trader has the position in place, a profit will generally result. It would nor
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mally behoove the strategist to take the profit at that time. Otherwise, follow-up
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action should adhere to the general kinds of action recommended for the strategies
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in question: protective action to prevent large losses in the case of the ratio spreads,
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or the taking of partial profits and possibly rolling the long options to a more at-the
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money strike in the case of the backspread strategies.
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SUMMARY OF VOLATILITY SKEWING
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Whenever volatility skewing exists - no matter what market - opportunities arise for
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the neutral strategist to establish a position that has advantages. These advantages
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arise out of the fact that normal market movements are different from what the
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options are implying. Moreover, the options are wrong when there is skewing at all
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strikes, from the lowest to the highest. The strategist should be careful to project his
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profits prior to expiration using the same skewing, for it may persist for some time to
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come. However, at expiration, it must of course disappear. Therefore, the strategist
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who is planning to hold the position to expiration will find that volatility skewing has
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presented him with an opportunity for a positive expected return.
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SUMMARY OF VOLATILITY TRADING
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The theoretical trading of options, mostly in a neutral manner, has evolved into one
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large branch - volatility trading. This part of the book has attempted to lay out the
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foundations, structures, and practices prevalent in this branch of trading. As the read
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er can see, there are some sophisticated techniques being applied - not so much in
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terms of strategy, but in terms of the ways that one looks at volatility and in the ways
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that stocks can move.
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Statistical methods are used liberally in trying to determine the ways that either
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volatility can move or stocks can move. The probability calculators, stock price dis
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tributions, and related topics are all statistical in nature. The volatility trader is intent
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on finding situations in which current market implied volatility is incorrect, either in
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its absolute value or in the skew that is prevalent in the options on a particular under- |