20 lines
1.4 KiB
Plaintext
20 lines
1.4 KiB
Plaintext
announcements, or the release of other news particular to an individual
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stock can cause anxiety, or fear, in traders and consequently increase
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demand for options that causes IV to rise. IV can fall when there is
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complacency in the market or when the anticipated news has been
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announced and anxiety wanes. “Buy the rumor, sell the news” is often
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reflected in option implied volatility. When there is little fear of market
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movement, traders use options to squeeze out more profits—greed.
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Arbitrageurs, such as market makers who trade delta neutral—a strategy
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that will be discussed further in Chapters 12 and 13—must be relentlessly
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conscious of implied volatility. When immediate directional risk is
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eliminated from a position, IV becomes the traded commodity. Arbitrageurs
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who focus their efforts on trading volatility (colloquially called vol traders )
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tend to think about bids and offers in terms of IV. In the mind of a vol
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trader, option prices are translated into volatility levels. A trader may look at
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a particular option and say it is 30 bid at 31 offer. These values do not
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represent the prices of the options but rather the corresponding implied
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volatilities. The meaning behind the trader’s remark is that the market is
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willing to buy implied volatility at 30 percent and sell it at 31 percent. The
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actual prices of the options themselves are much less relevant to this type of
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trader. |