41 lines
3.2 KiB
Plaintext
41 lines
3.2 KiB
Plaintext
Chapter 36: The Basics of Volatility Trading 739
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Note that Figure 36-4 indeed confirms the fact that $OEX options are consis
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tently overpriced. Very few charts are as one-dimensional as the $OEX chart, where
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the options were so consistently overpriced. Most stocks find the difference line
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oscillating back and forth about the zero mark. Consider Figures 36-5 and 36-6.
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Figure 36-5 shows a chart similar to Figure 36-4, comparing actual and implied
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volatility, and their difference, for a particular stock. Figure 36-6 shows the price
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graph of that same stock, overlaid on implied volatility, during the period up to and
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including the heavy shading.
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The volatility comparison chart (Figure 36-5) shows several shaded areas, dur
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ing which the stock was more volatile than the options had predicted. Owners of
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options profited during these times, provided they had a more or less neutral outlook
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on the stock. Figure 36-6 shows the stock's performance up to and including the
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March-April 1999 period - the largest shaded area on the chart. Note that implied
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volatility was quite low before the stock made the strong move from 10 to 30 in little
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more than a month. These graphs are taken from actual data and demonstrate just
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how badly out of line implied volatility can be. In February and early March 1999,
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implied volatility was at or near the lowest levels on these charts. Yet, by the end of
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March, a major price explosion had begun in the stock, one that tripled its value in
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just over a month. Clearly, implied volatility was a poor predictor of forthcoming
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actual volatility in this case.
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What about later in the year? In Figure 36-5, one can observe that implied and
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actual volatility oscillated back and forth quite a few times during the rest of 1999. It
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might appear that these oscillations are small and that implied volatility was actually
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doing a pretty good job of predicting actual volatility, at least until the final spike in
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December 1999. However, looking at the scale on the left-hand side of Figure 36-5,
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one can see that implied volatility was trying to remain in the 50% to 60% range, but
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actual volatility kept bolting higher rather frequently.
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One more example will be presented. Figures 36-7 and 36-8 depict another
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stock and its volatilities. On the left half of each graph, implied volatility was quite
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high. It was higher than actual volatility turned out to be, so the difference line in
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Figure 36-7 remains above the zero line for several months. Then, for some reason,
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the option market decided to make an adjustment, and implied volatility began to
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drop. Its lowest daily point is marked with a circle in Figure 36-8, and the same point
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in time is marked with a similar circle in Figure 36-7. At that time, options traders
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were "saying" that they expected the stock to be very tame over the ensuing weeks.
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Instead, the stock made two quick moves, one from 15 down to 11, and then anoth
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er back up to 17. That movement jerked actual volatility higher, but implied volatili
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ty remained rather low. After a period of trading between 13 and 15, during which
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time implied volatility remained low, the stock finally exploded to the upside, as evi
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denced by the spikes on the right-hand side of both Figures 36-7 and 36-8. Thus, |