52 lines
1.6 KiB
Plaintext
52 lines
1.6 KiB
Plaintext
464 Part IV: Additional Considerations
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TABLE 28-1.
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Implied volatilities, closing price, and volume.
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Option
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Option Price Volume
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January 30 41/2
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January 35 11/2
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April 35 21/2
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April 40 11/2
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TABLE 28-2.
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Volume weighting factors.
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Option
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January 30
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January 35
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April 35
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April 40
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Volume
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50
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90
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55
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5
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50
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90
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55
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~
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200
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Implied
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Volatility
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.34
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.28
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.30
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.38
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Volume Weighting Factor
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.25 (50/200)
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.45 (90/200)
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.275 (55/200)
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.025 ( 5/200)
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where x is the percentage distance between stock price and strike price and a is the
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maximum percentage distance at which the modeler wants to give any weight at all
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to the option's implied volatility.
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Example: An investor decides that he wants to discard options from the weighting
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criterion that have striking prices more than 25% from the current stock price. The
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variable, a, would then be equal to .25. The weighting factors, with XYZ at 33, could
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thus be computed as shown in Table 28-3. To combine the weighting factors for both
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volume and distance from strike, the two factors are multiplied by the implied volatil
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ity for that option. These products are summed up for all the options in question.
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This sum is then divided by the products of the weighting factors, summed over all
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the options in question. As a formula, this would read:
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Implied _ I,(Volume factor x Distance factor x Implied volatility)
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volatility - I,(Volume factor x Distance factor)
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In our example, this would give an implied volatility for XYZ stock of 29.8%
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(Table 28-4). Note that the implied volatility, .298, is not equal to any of the individ- |