37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
802 Part VI: Measuring and Trading Volatility
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Using 1,000 days of data:
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Median 100-day historical volatility: 48%
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Median 50-day historical volatility: 49%
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Median 20-day historical volatility: 52%
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Median 10-day historical volatility: 49%
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If these were all the data that one had, then he would probably use a volatility esti
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mate of 48% or so in his option models or probability calculators. Of course, this is
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starkly different from the current levels of historical volatility (shown at the begin
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ning of this example). So, one must be careful in assessing whether he expects the
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stock to perform more in line with its longer-term (1,000 trading days) characteristics
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or if there is some reason to think that the stock's behavior patterns have changed and
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the higher, more recent volatilities should be used.
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The pertinent volatilities to consider, then, in a strategy analysis are the medi
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ans as well as the current figures. If the trader were going to be buying options in his
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strategy, should he use the minimum of the volatilities shown, 48%? Probably.
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However, if he's a seller of options, should he use the maximum, 130%? That might
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be a little too much of a penalty, but at least he would feel safe that if his volatility
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selling position had a positive expected return with that high a volatility projection,
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then it must truly be an attractive position.
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In an analysis like that shown in this example, there is nothing magical about
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using 1,000 trading days. Perhaps something like 600 trading days would be better.
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The idea is to use enough trading days to bring in some historic data to counterbal
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ance the recent, erratic behavior of the stock.
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Among other things, this example also shows that volatilities are unstable, no
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matter how much work and mathematics one puts into calculating them. Therefore,
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they are at best a fragile estimate of what might happen in the future. Still, it's the
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best guess that one can make. The trader should realize, though, that when volatili
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ties are this disparate when comparing recent and more distant activity, the results of
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any mathematical projections using those volatilities should not be relied upon too
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heavily. Those results will be just as tenuous as the volatility projections themselves.
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Of course, in any case, the actual volatility that occurs while the position is in place
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may be even more unfavorable than the one the trader used in his initial analysis. There
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is nothing that one can do about that. But if you choose what appears to be a somewhat
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unfavorable volatility, and the position still looks good under those assumptions, then it
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is likely that the trader will be pleasantly surprised more often than not - that actual
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volatility during the life of the position will tend to be more in his favor than not. |