35 lines
2.1 KiB
Plaintext
35 lines
2.1 KiB
Plaintext
Chapter 39: Volatility Trading Techniques 843
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futures option markets. In particular, gold, silver, sugar, soybeans, and coffee options
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will from time to time display a form of volatility skewing that is the opposite of that
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displayed by index options. In these futures markets, the cheapest options are out-of
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the-money puts, while the most expensive options are out-of-the-money calls.
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Example: January soybeans are trading at 580 ($5.80 per bushel). The following
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table of implied volatilities shows how volatility skewing that is present in the soybean
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market is the opposite of that shown by the OEX market in the previous examples:
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January beans: 580
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Strike Implied Volatility
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525 12%
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550 13%
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575 15%
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600 17%
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625 19%
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650 21%
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675 23%
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Notice that the out-of-the-money calls are now the more expensive items, while
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out-of-the-money puts are the cheapest. This pattern of implied volatilities is called
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forward volatility skew or, alternatively, positive volatility skew.
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The distribution of soybean prices implied by these volatilities is just as incor
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rect as the OEX one was for the stock market. This soybean implied distribution is
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too bullish. It implies that there is a much larger probability of the soybean market
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rising 100 points than there is of it falling 50 points. That is incorrect, considering the
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historical price movement of soybeans.
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A strategist attempting to benefit from the forward ( or positive) volatility skew
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in this market has essentially three strategies available. They are the opposite of the
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three recommended for the $OEX, which had a reverse (or negative) volatility skew.
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First would be a call bull spread, second would be a put backspread, and third would
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be a call ratio spread. In all three cases, one would be buying options at the lower
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striking price and selling options at the higher striking price. This would give him the
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theoretical advantage.
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The same sorts of comments that were made about the OEX strategies can be
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applied here. The bull spread is a directional strategy and can probably only be
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expected to make money if the underlying rises in price, despite the statistical advan- |