# Another Options Thread



## wayneL (17 November 2010)

We(I) need one! 

Any ideas for a topic?

Also, we need another emilov to play with. 

Any volunteers?


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## BradK (17 November 2010)

wayneL said:


> Any ideas for a topic?
> 
> Also, we need another emilov to play with.
> 
> Any volunteers?




I volunteer. 

Could we talk about share renting?


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## Tama (17 November 2010)

Hi Wayne

How about something along the lines of...

The importance of picking the right direction of price movement, for winning with option plays, for mug punters.

eg if you pick the right direction do you always win??

Tama


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## wayneL (17 November 2010)

BradK said:


> I volunteer.
> 
> Could we talk about share renting?




:aufreg:

ROTFL


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## village idiot (17 November 2010)

In the interests of promoting more option discussion on this forum, I'll start with;


*Calendar spreads - I just don't get them.* 

To clarify, by Calendar spread I mean the traditional 'long' one where you buy the far month and sell the near month, both at same strike, which is usually at the money. 

A cal spread is supposed to make its money by the greater theta of the near month outweighing the far, but this actually only applies if the options are at or near the money, and any decent move from the strike takes it into loss. In fact the payoff profile is so pointy near the point of max profit that its never going to happen and the profit range so narrow its not going to finish within it very often. The only way a long calendar shows a decent profit is if the underlying finishes virtually unchanged, in other words it *wants little or no volatility*. 

A long calendar is supposed to be appropriate for times of low IV right, the thinking  being that when IV is low you are going to be paying a lower absolute amount for the spread, and that an increase in IV will affect the far month more than the near month, increasing the value of the spread.  in other words we are positive vega, in other words it *wants an increase in Implied Volatility*.  This is the alternative way to make money

Now my problem with the calendar is that the two 'wants' in bold are mutually exclusive; they are conflicting; you cant have both , or even have one with no effect on the other. 

IV just does not rise by any significant amount while the underlying stays virtually still. The only way you are going to get your "increased IV" wish is if actual volatility increases, and if the underlying moves by any decent amount then no amount of IV increase on options that are by now way in the money or out of the money are going to make a profit out of this trade. 

On the other hand suppose you get the "no volatility/movement" wish and the underlying does nothing till near expiry and it finishes right at the strike. Now it is a dead cert that IV will have dropped some more in the meantime (unless it was already at the lowest it could ever be, which is hard), so when you go to sell the far month it isnt worth what it was supposed to be. So your max profit really isnt even as good as the max profit in the ridiclously point payoff diagram you started with, and the same thing has reduced the effective profit range as well. 

Apart from a contrived scenario where the underlying experiences decent volatility and happens to finish near the strike when the music stops, I dont see how this could ever have a positive EV.

Discuss. (or just rip into me instead)


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## wayneL (18 November 2010)

Hey VI.

I don't trade straight out calendar spreads much for pretty much the reasons you outline.

However 3 points.


Implied Vol doesn't necessarily follow stat vol.

You don't have to let the front month option expire

You don't have to trade the ATM stread

For instance, is there is a situation where the underlying can stay pretty quiet with rising IV - earnings anyone? There is no law that says you have to let the front month expire before taking a profit, or that you have to let the announcement happen before trading out of it.

Another way to us the calendar spread is as a low risk directional trade with +vega and +theta. An OTM put calendar for example.

Once again you don't have to wait till front month expiry to close the trade and collect a profit.

Just some thoughts.


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## village idiot (18 November 2010)

wayneL said:


> Implied Vol doesn't necessarily follow stat vol.
> 
> You don't have to let the front month option expire
> 
> ...




some thoughts back; 

true IV doesnt nec follow stat vol, in fact it does fluctuate around a bit on its own, but the magnitude of these fluctuations is not usually enough to make it profitable. To put some numbers to it, if IV =20% when opening, it may well drift back up to 21 or 22, but even if you catch the top of that move I dont think that would be enough to overcome time decay, trading costs and bid ask spread if any, at least by enough to show a respectable profit. If IV went to 25% that would be enough to generate a profit, but i am saying changes of that magnitude dont happen in absence of actual vol, or at least not very often.

if a temporary IV increase is expected due to earnings report or similar, would not a straight vol play (eg straddle purchase) be better?


*You don't have to let the front month option expire*Could you explain with maybe an example of what you mean? I havent crunched every scenario but would have thought that since IF you find yourself in the position the options are at the money and the spread is in profit , the nearer to expiry the more the difference in theta opens up,  the more incentive there is to let the near month expire, and that closing early reduces max profit some more?

*You don't have to trade the ATM stread. Another way to us the calendar spread is as a low risk directional trade with +vega and +theta. An OTM put calendar for example*.
agree totally. an OTM calendar is a completely different animal which is why i was careful to refer only to ATM spreads.


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## sinner (18 November 2010)

Hi wayne,

I am interested in the idea of using long delta strategies to capture seasonal volatility in commodity options. I have been using my long delta model on QQQQ, SPY, XLF, GDX, XLE with some success (thanks to much help from mazza and wayne), and while examining its potential in commodity markets I noticed some signals seemed to match up with what I remembered of commod seasonality.

This seems like it could work ok (theoretically), because usually if traders expectations of normal seasonal occurences aren't met, there is a good chance of volatility as spec positions on the underlying are unwound/crushed?

So we would have a leg up on the normal commod traders, who have to trend or fade with their idea of what seasonality would bring. We just know at X time of year, expectations of supply/demand will shift rapidly and should long delta position accordingly in advance.

From: http://www.tradingarticles.com/seasonality.html



> Corn: This market's seasonality can be divided into three time periods: late spring to mid-summer; mid-summer to harvest; and post-harvest. The most pronounced seasonal trend in corn is the decline of prices from mid-summer into the harvest period. Prices are often near their highest level in July because of factors associated with the old crop and uncertainty over new crop production. Even in years when a price decline begins before mid-July, it can continue after mid-July if the crop outlook is favorable. Harvest adds large supplies to the marketing system, which normally pressures prices to their lowest levels of the crop year. Prices usually rise following harvest. However, the "February Break" is a well-known phenomenon whereby corn prices usually show some degree of decline during the month of February.




So, perhaps as an example, position long delta at the start of Jan to close out the end of Feb, and same at start of June to close out the end of July. Obviously filtering opportunities with an eye to vega risk.






> Cotton: Cotton is a market where the "trade" has very heavy participation and seasonals tend to be a function of heavy deliveries issued against the expiring futures contracts--December, March, May, July, and to a lesser degree, October. In November, the market tends to recover from harvest lows, and then in January the market tends to back off to lower levels.




Position in advance for Jan expectations by going long delta start of December, position in advance for Nov expectations by going long delta start of October?



Just a thought. *Not sure if this is the sort of suggestion you had in mind for the thread.* I really like the idea though. If traders seasonality expectations are right, we might only make a tiny little bit of money. But if they are wrong, we stand to gain bigtime. By only positioning long delta during times when we know real supply and demand is hitting the market (due to harvest or whatever) we avoid our chances of the price going nowhere for the duration.


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## mazzatelli (18 November 2010)

village idiot said:


> but even if you catch the top of that move I dont think that would be enough to overcome time decay, trading costs and bid ask spread if any




Long calendars are +theta [atm]



> if a temporary IV increase is expected due to earnings report or similar, would not a straight vol play (eg straddle purchase) be better?



If setups are available, steep tenor skews [>10% bpts] to flatten +  falling stat vols --> calendar > long straddle for earnings plays



> IF you find yourself in the position the options are at the money and the spread is in profit , the nearer to expiry the more the difference in theta opens up,  the more incentive there is to let the near month expire, and that closing early reduces max profit some more?



Short gamma outweighs theta, even close to expiry. Loose qualifier - I personally prefer to offset once it touches neutrality.


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## village idiot (18 November 2010)

mazzatelli said:


> Long calendars are +theta [atm].




Yeah was waiting to get pulled up on that little cockup. Dunno what i was thinking when i wrote that. my bad. 



mazzatelli said:


> Short gamma outweighs theta, even close to expiry. Loose qualifier - I personally prefer to offset once it touches neutrality.



do you mind explaining that a bit mazz? 'outweighs' implies a direct comparison has been made - do you use some quantitative method of comparing the gamma with the theta or is that just a personal preference not to be short gamma? How do you define the point at which it touches neutrality? thanks


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## mazzatelli (19 November 2010)

Tama said:


> The importance of picking the right direction of price movement, for winning with option plays, for mug punters.
> e.g. if you pick the right direction do you always win??




Picking vol with direction certainly helps.



village idiot said:


> 'outweighs' implies a direct comparison has been made - do you use some quantitative method of comparing the gamma with the theta or is that just a personal preference not to be short gamma? How do you define the point at which it touches neutrality?




I should clarify the context for neutrality - trading otm calendars. Neutrality = spot converges to strike.

Anyone who has tried trading atm calendars as "income" plays, will have experienced at one point, any theta gains over weeks, wiped out by one day's movement. Hence Wayne's point about offsetting the short, prior to expiry.

It can be modeled quantitatively by plotting the partial derivatives against each other. You'll observe the curvature is different.



sinner said:


> By only positioning long delta during times when we know real supply and demand is hitting the market (due to harvest or whatever) we avoid our chances of the price going nowhere for the duration.



Awesome!! Like the idea, very similar to some earnings/target plays as stat-vols will certainly rise for seasonal events.
I see no issues if you're using similar parameters to your index/equity model.


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## Tysonboss1 (19 November 2010)

Sorry if this has been covered in another thread, But I couldn't find an answer anywhere.

When it comes to index options, Is each index point worth $1 or $10. I have read conflicting infomation from different sources.


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## cutz (19 November 2010)

Tysonboss1 said:


> When it comes to index options, Is each index point worth $1 or $10. I have read conflicting infomation from different sources.





An XJO index option point is worth $10.


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## Tysonboss1 (19 November 2010)

cutz said:


> An XJO index option point is worth $10.




Thanks Cutz,

So am I right in my assumption that because there are 10contracts in each index option that each 1 piont movement in the index = $100.

So if I write a put option on an index @ 4000points and it hits 3500points I suffer a loss of $50,000 (ignoring the premium).


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## cutz (19 November 2010)

Tysonboss1 said:


> So if I write a put option on an index @ 4000points and it hits 3500points I suffer a loss of $50,000 (ignoring the premium).




G'Day,

If you short 1ea Put option at 4000, at 3500 you will take a loss of $5000 minus the premium.


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## Tysonboss1 (19 November 2010)

cutz said:


> G'Day,
> 
> If you short 1ea Put option at 4000, at 3500 you will take a loss of $5000 minus the premium.




Ok, I get it now (correct me if i am wrong).

 1 point is actually $1, however because 1 put contract has 10units in it, the contract as a whole has a value of $10/point. this is where my confusion came from I had one text talking $1 / point and another saying 10 dollars.


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## sinner (19 November 2010)

mazzatelli said:


> Awesome!! Like the idea, very similar to some earnings/target plays as stat-vols will certainly rise for seasonal events.
> I see no issues if you're using similar parameters to your index/equity model.




Hi mazza!

Glad you like the idea. Things have developed very nicely since we spoke last.

The above is just an example, I haven't tested it out, and thinking about it now, there must be some differences between options on cash and options on futures which I probably didn't consider.

Perhaps this difference would be a good topic to discuss? I am certainly interested to learn about it.


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## Tysonboss1 (19 November 2010)

Hi Guys,

I have been reading to try and expand my knowledge on put options ( until now I have only ever sold covered calls )

I noticed in one of the texts I was reading it mentioned that ACH pays interest on the margins it collects from puts.

My question is does commsec (or any other brokers) pass any of this interest on to the customer.


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## village idiot (20 November 2010)

mazzatelli, thanks for your reply. 

do you mean like this;?




This is an attempt to plot gamma v theta as you suggest. the pink and blue lines are for a 100 XYZ call, XYZ=100, int rate=5% Vol=15%, using an option model.  for comparison purposes gamma is rebased so it equals theta at 28 calendar days to expiry. 
The turquoise and yellow lines represent the net gamma/theta of a Call calendar spread  commencing at 28/56 calendar days to expiry ie four weeks apart. 

Only trouble is I am not seeing any indication that gamma outweighs theta using this method. am i doing it wrong, or perhaps you are meaning spreads that start further out in time?


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## village idiot (20 November 2010)

By gamma risk I suppose we are really referring to a risk of 'movement away from current price', as in a long calendar or short straddle it hurts us either way (assuming the current price is at the strike we like)

i guess i have taken a differnt approach in the past in that instead of loooking at the gamma number, i tend to look at the (historical) actual distribution of returns for that stock/index over the corresponding period and seek to determine whether closing or running it is the highest EV, and that is what i base my decison on. 

In most case i seem to get the result that it is better to run it, in other words the cost to close in preimum  outwieghs the risk of a movement outside the current profit zone, which has led me to a rule of thumb that;

if i find myself short an option at the money with short time (say 1 day up to 2 weeks) to go it is better to let it run to expiry (unless under threat of early assignment) and
if i find myself long an option at the money with short time to go i am better off taking the premium available back at that point rather than 'hoping' for a favourable movement bigger than the premium 

This rule of thumb seems to be opposite of what yourself and wayne are saying, which is something of a worry; if i have got it wrong i need to know about it. 

In the case of a calendar spread, it seems to me a moderate move away hurts us more than it would if short a straddle/iron fly, so in that case i can certainly see (now) why it would be better to close a long calendar as the underlying converges or crosses the strike.   still not sure about the other situations though..


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## mazzatelli (20 November 2010)

village idiot said:


> Only trouble is I am not seeing any indication that gamma outweighs theta using this method. am i doing it wrong, or perhaps you are meaning spreads that start further out in time?




x-axis: spot price, y-axis: superimpose gamma and theta.
Here is the plot for a long call payoff: S=100, t=30, volty=15%, r=10%, you can play with the calendar equivalent.






	

		
			
		

		
	
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Mathematically, approximation between the two partials:

```
-theta ~ 0.5 * gamma * S^2 * sigma^2
```
Theta is about half the magnitude of gamma.



village idiot said:


> By gamma risk I suppose we are really referring to a risk of 'movement away from current price'





sinner said:


> Perhaps this difference would be a good topic to discuss? I am certainly interested to learn about it.




vi, I respectfully disagree with your interpretation of gamma, and sinner, that is a good topic to discuss but I must let Wayne have his fun!!!  Less bs in his explanations too, lol.


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## mazzatelli (20 November 2010)

mazzatelli said:


> Theta is about half the magnitude of gamma, *in this case*.




Revised, r is assumed to be zero


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## village idiot (20 November 2010)

mazza

thanks once again for your reply, which as always is;-

- too short
- highly knowledgable and technical
- over my head 
- makes me want to ask 3 more questions...





mazzatelli said:


> vi, I respectfully disagree with your interpretation of gamma




well to be fair its certainly not my interpretation of gamma, but it is my interpretation of the main risk facing someone in the specifc situation of being an a short straddle or long calendar or a butterfly, who finds himself with the underlying right at the relevant strike at a time when the 'end game' is commencing ie the payoff profile falls off sharply to either side of the current price. That gamma is high in these situations obv exacerbates the change that can happen in his portfolio quickly, but to call a spade a spade he just doesnt want a sharp move either way, gamma or no gamma

 so what should we call that? perhaps movement risk?


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## mazzatelli (27 November 2010)

Ha! If you can't dazzle them with brilliance, then baffle them with bullsh*t



village idiot said:


> That gamma is high in these situations obv exacerbates the change that can happen in his portfolio quickly, but to call a spade a spade he just doesnt want a sharp move either way, gamma or no gamma




There you go, couldn't have said it better myself. Apologies, I know you understand the risks, its just for pedant reasons I'm debating definitions, as new people who read it may take that interpretation of gamma.

E.g. short otm gamma - the figure would be small, initially. It would be confusing to apply the interpretation "risk of 'movement away from current price", as you are referring to atm parameters.


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## village idiot (28 November 2010)

yeah point taken, I guess I could have avoided some confusion by being more specific in the first place. 

I had cause to consider this topic last week when i had a calendar in WOW in just the position we were talking about; i had opened a nov/dec long calendar 27.00 put spread when WOW was around $29 a while back as a cheap speculative directional play, more of an experiment than anything else really to follow how it went.  As it turns out it went really well as the slow grinding movement ended up at the strike at just the right time, and it is nice to see a spread with *both* legs in profit on the way down.

it first crossed the strike on tuesday am which is when you suggest closing it, and I wouldnt have been too far wrong in doing so.  I chose to hang on however and ended up closing it on thursday am  with WOW at 27.01. That was more to do with the fact i had to go out for ther rest of the day and couldnt risk assignment than being worried about it moving away by more than the amount i was 'paying' to buy it back 4 hours early. 

as it turns out i prolly didnt make too much more by hanging on (v closing when it first crossed), even though it stayed right where i wanted it, so next time i am in that position i would  at least give closing as it crosses more consideration.


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## mazzatelli (29 November 2010)

Nice! It depends on your trading method.
E.g. Model predicts a 1stdev drop in Px, 1stdev rally in stat-vols with favorable tenor skew. Long otm put calendar and offset when forecasts are touched.

If you play delta neutral, +theta with discretionary adjustments, its reasonable to hold on, and extract as much bleed as tolerable.

Additional topic: implied vol is used to consider future realized vol. Usually the implied vol figure is taken for granted. Where does it come from? How is it calculated?
Furthermore how should we measure/calc realized vol?

Discuss.


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## sails (29 November 2010)

mazzatelli said:


> ...If you play delta neutral, +theta with discretionary adjustments, its reasonable to hold on, and extract as much bleed as tolerable...




While testing calendars some time ago now, I found it doesn't always pay to hold on to OTM calendars close to expiry due to extrinsic value falling faster in the back month than the front (theta turns negative in the position).  Just something to keep an eye on.  Unless the crystal ball is working well and the market looks certain to come to your strike at expiry, then hold on...:

Mazza, please feel free to translate the above into official terminology...

VI, well done on your WOW calendar...


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## mazzatelli (29 November 2010)

sails said:


> While testing calendars some time ago now, I found it doesn't always pay to hold on to OTM calendars close to expiry due to extrinsic value falling faster in the back month than the front (theta turns negative in the position).  Just something to keep an eye on.  Unless the crystal ball is working well and the market looks certain to come to your strike at expiry, then hold on...:




lol M, while you produce essays, I'll condense to one liners.
Back month g/v bleed > front month, closer to expiry : 

Right, calendar is +theta when otm. I was referring to when the position was initially otm, touches neutrality and subsequent decision to hold or not - rather than holding an otm spread into expiry.


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## mazzatelli (3 December 2010)

mazzatelli said:


> Furthermore how should we measure/calc realized vol?




Not flogging a dead horse, but will spew verbatim before I'm off on a loooong holiday :bananasmi

Normally, close-to-close estimation is the calc for realized vol, however there could [up to you to research] be a measurement error - i.e. it is not an accurate measure of RV. 
Any volty analysis could be leading to incorrect conclusions by comparing to a misleading RV.

Similar thinking applies to iv.

Any thoughts?


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## wayneL (3 December 2010)

mazzatelli said:


> Not flogging a dead horse, but will spew verbatim before I'm off on a loooong holiday :bananasmi
> 
> Normally, close-to-close estimation is the calc for realized vol, however there could [up to you to research] be a measurement error - i.e. it is not an accurate measure of RV.
> Any volty analysis could be leading to incorrect conclusions by comparing to a misleading RV.
> ...




I've always thought hi-lo should be incorporated into RV calcs somehow. Never found a way to do that successfully however.

I'm all ears.


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## sinner (3 December 2010)

As an options noob, I did research on RV to try and understand what the hell mazza was talking about. I learned there are tricks.

There are many papers which deal with calculating RV based on tick sampling.



> Central limit theorem for the realized volatility based on tick time sampling
> Masaaki Fukasawa
> A central limit theorem for the realized volatility estimator of the integrated volatility based on a specific random sampling scheme is proved, where prices are sampled with every ‘continued price change’ in bid or ask quotation data. The estimator is shown to be robust to market microstructure noise induced by price discreteness and bid–ask spreads. More general sampling schemes also are treated in case that the price process is a diffusion.



http://www.springerlink.com/content/n0hmvu8q307l773l/



> 6. CONCLUSION In this paper we reviewedthe concept of realized volatility and correlation. We investigated the behaviour of daily volatility estimators as advocated by Bollen and Inder (2002) and Andersen et al.(2001b). In particular, by taking the study by Andersen et al. (2001b) as reference, we established that their findings also hold true for JSE stocks. The distribution of the daily returns for all the realized volatility estimators, standardized by the daily volatility estimates, is nearly Gaussian, and so is the distribution of the log of the daily volatility estimates. This is generally true for all the shares considered. The finding that daily standardized returns are normally distributed can give new impetus for the application of classic mean variance analysis. We also show that the realized volatility estimators differ fundamentally from the GARCH type estimates of daily volatility. To clarify the relation between the GARCH approach and the realized volatility approach to volatility measurement, we conducted further research which is reported in Venter et al. (2006). This paper points out that a traditional GARCH type estimator may be thought of as a measure ofex pec ted daily volatility given past information and introduces a new type of GARCH volatility called the actual daily volatility, which is quite close to the realized volatility.



http://www.scribd.com/doc/36871300/An-Introduction-to-Realized-Volatility

scholar.google.com is your friend.

Are the equations

(((Open-Close)*(Open-Close))/Close)*100

or

((High-Low)/Close)*100

of any use to you?


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## village idiot (3 December 2010)

isnt what you are talking about, what is called the 'extreme value' method as an alternative to the close to close method;


http://www.linnsoft.com/tour/volatility.htm 


dunno where the .601 comes from but this formula does seem to make the number spat out by the extreme value method closely match the traditional method


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## village idiot (3 December 2010)

and since you raise the subject i am going to throw this out for comment;

seems to me all traditional methods of measuring volatility concentrate on measuring the change (close to close), or range (hi-lo) , over a fixed period (most commonly one day). 

a variant I have been working on in a spreadsheet turns it round and fixes the *movement* rather than the *period*; it attempts to measure how often a fixed movement occurs over some longer period.  Suppose we fix a target movement at say 1% (so 2 targets , +1% and -1%). each time there is a 1% movement, up or down,  2 new targets are set @ +- 1%.  we use highs and lows to determine each day whether a target movement has been hit, so closes are irrelevant. the targets remain the same until one is hit ie they dont move on a daily basis. so it captures intraday movemnts as well as cumlative smaller movemnts if they add up to a larger one but not otherwise

the result is a number of x% movements per y trading days figure, which corresponds to the number of adjustments you would make if using a delta hedging strategy, adjusting every x%, which is what you want to know a lot of the time

anyone see any merit in this approach?


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## sinner (4 December 2010)

village idiot said:


> and since you raise the subject i am going to throw this out for comment;
> 
> seems to me all traditional methods of measuring volatility concentrate on measuring the change (close to close), or range (hi-lo) , over a fixed period (most commonly one day).
> 
> ...




Like this? P&F(High Low) 1% boxsize, 1 box reversal.


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## village idiot (4 December 2010)

yes, each move is exactly the same as one box on an P&F chart. 
the measure of volatility is essentially how many of those boxes occur over whatever time frame is being considered.


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## mazzatelli (4 December 2010)

sinner said:


> There are many papers which deal with calculating RV based on tick sampling.




Yes, as you'd know, the increase in frequency allows the sampling distribution to converge to normal. There are practical limitations: access to tick data and micro-structure affecting vol calcs if periodicity is high.

There's a lot of work developing in this topic from both an academic and practitioner's point of view.

Take the logarithmic form:
ln(high/low) or [ln(high) - ln(low)]



village idiot said:


> dunno where the .601 comes from but this formula does seem to make the number spat out by the extreme value method closely match the traditional method




Yes.
The 0.601 comes from sqrt(1/4ln2).
If vol is not driven by large intra-day changes, then the two measurements are similar.
However if hi-lo vol=50% and close-to-close=25%, then close to close under-represents true vol. This has an effect on delta adjustments.



village idiot said:


> the result is a number of x% movements per y trading days figure, which corresponds to the number of adjustments you would make if using a delta hedging strategy, adjusting every x%, which is what you want to know a lot of the time
> 
> anyone see any merit in this approach?




Looks like you are defining a distribution, but instead of conventional sigmas, you are choosing arbitrary percentages. It's similar to hedging based on fixed deltas, but I wouldn't call it a measure of vol itself.
I definitely would not use it to price securities.


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## village idiot (5 December 2010)

mazzatelli said:


> Yes.
> The 0.601 comes from sqrt(1/4ln2).
> If vol is not driven by large intra-day changes, then the two measurements are similar.
> However if hi-lo vol=50% and close-to-close=25%, then close to close under-represents true vol. This has an effect on delta adjustments.




thanks 
we ought to call this thread the mazzatelli well; shout any question you like down it and mazzatelli shouts the answer back up...

Out of interest I've just done this chart so i might as well put it up here;

the chart shows three different measures of vol for 14 diffrent instruments, arranged in order of HV (close-close); it compares close-close HV with Hi-Lo HV, as well as the  frequency of 2% moves (expressed as a percentage). All are over 250 days. Cant disagree that the 2% is arbitrary.






close-close HV and Hi-Lo HV match each other closely, except perhaps for the observation that in the lower vol instruments the Hi-Lo HV is higher than close-close, indicating there may be more intraday vol than the close-close HV is letting on in 'low vol' stocks. the correlation coefficient for these two is 0.9490 (for this particular sample)

the third bar is the measure i outlined above. the correlation between this bar and the close-close HV is actually 0.9855, which is a bummer as I was actually looking to find *differences* between close-close HV and frequency of useable movement...


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## mazzatelli (5 December 2010)

Hey vi, thanks for putting up you analysis 
For equities, try comparing hi-lo to open-close...


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## village idiot (7 December 2010)

isnt open-close going to be the same as close-close minus any gaps? 

or am I being leveled?


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## mazzatelli (9 December 2010)

Its because of assumptions behind hi-lo [continuous, GBM process, 24hr market] - so open-to-close is considered a more appropriate comparison.


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## sinner (10 December 2010)

mazzatelli said:


> Hey vi, thanks for putting up you analysis
> For equities, try comparing hi-lo to open-close...




Agreed, cool chart, can we see the Open-Close one as a column?


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## mazzatelli (13 December 2010)

village idiot said:


> the third bar is the measure i outlined above. the correlation between this bar and the close-close HV is actually 0.9855, which is a bummer as I was actually looking to find *differences* between close-close HV and frequency of useable movement...




You should probably run a regression, rather than a correlation figure...


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## mazzatelli (22 December 2010)

So far we have addressed measurement errors in realized vol, in which we are trying to forecast.
As seen by vi's alternate measure, different measurements could yield relationships that do/don't exist [data and statistical errors aside].

It has been widely documented that iv compared to hv, is the better predictor of rv [exogenous regressors not included].
I understand that the following material will not be in some people's scope, but it is something to think about.

Firstly, it is taken for granted that iv is backed out of the Black Scholes model. But what about iv being backed out of more "accurate" pricing models e.g Heston? Does this iv have > information than the one coming from BSM?

Finally, once it is decided which iv measurement to take, is it simply taking the atm implied vol as the implied figure? What about factoring in skew [tenor and horizontal]?


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