tailieunhanh - PROFIT WITH OPTIONS CHAPTER 7

7 BUY LOW AND SELL HIGH—VOLATILITY, THAT IS. LEARNING OBJECTIVES: The material in this chapter helps you to: • Determine when volatility is out of line. • Use the percentile approach to determine if options are cheap or expensive. • Analyze the reasons behind volatility changes. | 7 BUY LOW AND SELL HIGH VOLATILITY THAT IS Learning Objectives The material in this chapter helps you to Determine when volatility is out of line. Use the percentile approach to determine if options are cheap or expensive. Analyze the reasons behind volatility changes. Apply the criteria for straddle buying. Calculate ever and closing probabilities. Know when to use strangle sales and call ratio spreads. Understand the criteria for selling naked options. The best situations for trading volatility occur when implied volatility is considerably out of line with where it has been in the past. We are often tempted to think that it is sufficient to compare historical volatility with implied volatility in order to find volatility trades. However it is not enough that there is a big discrepancy between these two types of volatility. We also need to 211 212 BUY LOW AND SELL HIGH VOLATILITY THAT IS know where both implied and historical volatilities have been over the past months or maybe even a year that is we want to know what range they have been trading in. Even if implied is much higher than historical we should not automatically sell the volatility unless the trading range of implied volatility confirms that it is high with respect to where it s been in the past. This chapter gives you some general principles to use in forming your volatility trading strategies. DETERMINING WHEN VOLATILITY IS OUT OF LINE Let s begin our discussion with an example of volatility analysis. The following are readings of OEX volatility taken from February 1995 just before the market embarked on an upside explosion of historic proportions. If the implied volatility of OEX was 11 and the historical volatility was 6 a trader might want to sell options because of the differential between historical and implied. From this limited bit of information that does seem like a logical conclusion. However on further investigation it will be obvious that it is an incorrect conclusion. OEX options .

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