25 lines
1.6 KiB
Plaintext
25 lines
1.6 KiB
Plaintext
Trading Realized Volatility
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So far, we’ve discussed many option strategies in which realized volatility
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is an important component of the trade. And while the management of these
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positions has been the focus of much of the discussion, the ultimate gain or
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loss for many of these strategies has been from movement in a single
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direction. For example, with a long call, the higher the stock rallies the
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better.
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But increases or decreases in realized volatility do not necessarily have an
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exclusive relationship with direction. Recall that realized volatility is the
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annualized standard deviation of daily price movements. Take two similarly
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priced stocks that have had a net price change of zero over a one-month
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period. Stock A had small daily price changes during that period, rising
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$0.10 one day and falling $0.10 the next. Stock B went up or down by $5
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each day for a month. In this rather extreme example, Stock B was much
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more volatile than Stock A, regardless of the fact that the net price change
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for the period for both stocks was zero.
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A stock’s volatility—either high or low volatility—can be capitalized on
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by trading options delta neutral. Simply put, traders buy options delta
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neutral when they believe a stock will have more movement and sell
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options delta neutral when they believe a stock will move less.
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Delta-neutral option sellers profit from low volatility through theta. Every
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day that passes in which the loss from delta/gamma movement is less than
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the gain from theta is a winning day. Traders can adjust their deltas by
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hedging. Delta-neutral option buyers exploit volatility opportunities through
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a trading technique called gamma scalping. |