37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
838 Part VI: Measuring and Trading Volatility
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Note that the implied volatilities of the individual options range from a low of
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38% to a high of 53%. This is a rather large discrepancy for options on the same
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underlying security, but it is useful for exemplary purposes.
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A neutral strategy could be established by buying options with lower implied
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volatilities and simultaneously selling ones with higher volatilities, such as buy 10
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February 45 calls and sell 20 January 50 calls. Examples of neutral spreads will be
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expanded upon in the next chapter, when more exact measures for determining how
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many calls to buy and sell are discussed.
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Before jumping into such a position, the strategist should ask himself if there is
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a valid reason why the different options have such different implied volatilities. As a
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generalization, it might be fair to say that out-of-the-money options have slightly
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higher implieds than at-the-money ones, and that longer-term options have lower
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implieds than short-term ones. But there are many instances in which such is not the
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case, so one must be careful not to overgeneralize.
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Speculators often desire the lowest dollar-cost option available. Thus, in a
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takeover rumor situation, they would buy the out-of-the-moneys as opposed to the
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higher-priced at- or in-the-moneys. If the out-of-the-moneys are extremely expen
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sive because of a takeover rumor, then the strategist must be careful, because the
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neutral strategy concept may lead him into selling naked calls. This is not to say
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he should avoid the situation altogether; he may be able to structure a position
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with enough upside room to protect himself, or he may believe the rumors are
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false.
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Returning to the general topic of differing implied volatilities on the same
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underlying stock, the strategist might ask how he is to determine if the discrepancies
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between the individual options are significantly large to warrant attention. A mathe
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matical approach is presented at the end of the next chapter in a section on advanced
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mathematical concepts. Suffice it to say that there is a way that the differences in the
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various implieds can be reduced to a single number - a sort of "standard deviation of
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the implieds" that is easy for the strategist to use. A list of these numbers can be con
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structed, comparing which stocks or futures might be candidates for this type of neu
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tral spreading. On a given day, the list is usually quite short - perhaps 20 stocks and
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10 futures contracts will qualify.
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The concept of the implied volatilities of various options on the same underly
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ing stock remaining out of line with each other is one that needs more discussion. In
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the following section, the idea of semipermanent distortion between the volatilities
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of different striking prices is discussed. |