35 lines
2.6 KiB
Plaintext
35 lines
2.6 KiB
Plaintext
824 Part VI: Measuring and Trading Volatllity
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However, if there is no news that would seem to explain why the options are so
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cheap or so expensive, then the volatility trader can continue on to the rest of his
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analyses.
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SELECTING THE STRATEGY TO USE
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In general, when one wants to trade volatility, a simple approach is best, especially if
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one is buying volatility. If there is a volatility skew involved, then there may be other
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strategies that are superior, and they are discussed in the latter part of this chapter.
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However, when one is interested in the straight trading of volatility because he thinks
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implied volatility is out of line, then only a few strategies apply.
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If volatility is too low, then either a straddle or a strangle should be purchased.
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One would normally choose a straddle if the underlying instrument is currently trad
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ing near an available striking price. However, if the underlying is currently trading
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between two ~riking prices, then a strangle might be the better choice. In either case,
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a position trader would want to buy a straddle with several months of life remaining,
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in order to improve his chances of making a profit. There is no "best" time length to
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use, so one should use a probability calculator to aid in that decision. The use of prob
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ability calculators will be discussed shortly.
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Example: XYZ is trading at 39.60 and a volatility trader has determined that he wants
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to buy volatility. With this information, he should attempt to buy a straddle with a
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striking of 40 for both the put and the call.
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Suppose that the current date is in December, and the available expiration
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months for XYZ are January, February, April, July, and October, plus LEAPS for
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January of the next year. Then he would analyze each straddle (January 40, February
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40, April 40, etc.) to see which is the best one to buy. It generally seems to work out
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that the midrange straddles have the best probabilities of success, given the way that
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option prices are usually structured. Of course, the actual prices of each straddle
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would be considered when using the probability calculator. In this case, then, the July
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40 or October 40 straddle would probably be the best choices from a statistical view
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point for a position trader.
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If XYZ had been trading at a price of 37.50, say, then the trader would proba
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bly want to consider buying a strangle: buying a call with a striking price of 40 and a
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put with a striking price of 35. From the viewpoint of buying strangles, it does not
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make sense to separate the strikes by more than one striking price unit - 5 points for
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stock options, for example. This just makes the position more neutral to begin with. |