Trading Options Volatility

[ducati916]

What's the latest thinking?

.FHAHH quote
6.50 unch
Open NA Open Interest 14,861
Bid 6.800 Previous Close 6.500
Bid Size 294 Volume NA
Ask 6.900 Day's High NA
Ask Size 79 Day's Low NA
Strike Price 40.000 Days Until Expiration 22
Expiration Date August 19, 2006

.FHAAJ quote
2.40 +0.20 +9.09%
Open 2.400 Open Interest 14,384
Bid 2.400 Previous Close 2.200
Bid Size 838 Volume 26
Ask 2.500 Day's High 2.400
Ask Size 10 Day's Low 2.400
Strike Price 50.000 Days Until Expiration 176
Expiration Date January 20, 2007

 

[wayneL]

Anyway, remember this? LOL

Ahahaha! Yes indeed. Anyway I've been like a one armed bricklayer in Beirut with all my blog nonsense, Sory I haven't kept up to date with this.

 

[wayneL]

What's the latest thinking?

.FHAHH quote
6.50 unch
Open NA Open Interest 14,861
Bid 6.800 Previous Close 6.500
Bid Size 294 Volume NA
Ask 6.900 Day's High NA
Ask Size 79 Day's Low NA
Strike Price 40.000 Days Until Expiration 22
Expiration Date August 19, 2006

.FHAAJ quote
2.40 +0.20 +9.09%
Open 2.400 Open Interest 14,384
Bid 2.400 Previous Close 2.200
Bid Size 838 Volume 26
Ask 2.500 Day's High 2.400
Ask Size 10 Day's Low 2.400
Strike Price 50.000 Days Until Expiration 176
Expiration Date January 20, 2007

I remain mildly convinced we end up out of the danger zone by august expiry. (But seeing as Margaret has invoked Murphy's Law, we are now gauranteed to close at around 46-47 come 19 Aug LOL) I haven't made the sold option adjustments I mentioned, but have been delta hedging with stock as mentioned somewhere above. This has been working well enough to keep this mildly profitable.

I'm giving myself 6/10 for this trade so far... no more.

I'll try and keep this updated.

 

[sails]

LOL Wayne - Murphy needs neither invoking nor inviting...
but he does have to stand aside when Lady Luck arrives

 

[ducati916]

What's the latest thinking?




.FHAAJ quote
2.40 -0.05 -2.04%
Open 2.500 Open Interest 14,478
Bid 2.300 Previous Close 2.450
Bid Size 31 Volume 58
Ask 2.350 Day's High 2.500
Ask Size 10 Day's Low 2.400
Strike Price 50.000 Days Until Expiration 162
Expiration Date January 20, 2007

.FHAHH quote
7.30 unch
Open NA Open Interest 14,669
Bid 6.800 Previous Close 7.300
Bid Size 249 Volume NA
Ask 7.000 Day's High NA
Ask Size 126 Day's Low NA
Strike Price 40.000 Days Until Expiration 8
Expiration Date August 19, 2006

jog on
d998

 

[ducati916]

Expiry today as far as trading goes [Saturday is the last day for being exercised]

So how has it all working out in the wash?
.FHAAJ quote
2.85 -0.35 -10.94%
Open 2.850 Open Interest 14,619
Bid 2.850 Previous Close 3.200
Bid Size 472 Volume 5
Ask 2.950 Day's High 2.850
Ask Size 201 Day's Low 2.850
Strike Price 50.000 Days Until Expiration 155
Expiration Date January 20, 2007




.FHAHH quote
8.00 -0.50 -5.88%
Open 8.000 Open Interest 14,590
Bid 7.800 Previous Close 8.500
Bid Size 111 Volume 3
Ask 8.000 Day's High 8.000
Ask Size 41 Day's Low 8.000
Strike Price 40.000 Days Until Expiration 1
Expiration Date August 19, 2006

jog on
d998

 

[wayneL]

I'll have to tally it up when its all over.

I'm keeping the long calls for now and I have been dedging delta with long stock so have to work it all out.

I think the actual option strategy will finish with a small loss.

I'll be away from my main computer till tuesday so will do a post mortem next week...

I thought this was going to kick into the profit zone at the last minute, but alas I've run out of time.

Overall with the long stock, a profit, but not well executed.

Cheers

 

[ducati916]

That's fine, I'll look forward to reading the post-trade analysis.

jog on
d998

 

[Magdoran]

Hello Wayne,


So, what was the final outcome of this trade? How did it end up, I’m curious?


Regards


Magdoran

 

[ducati916]

et al

And while we while away the hours, a little Options strategy that requires a rigourous risk analysis;

*Buy long dated Option [11mths expiry]
*Sell short dated Option [1 month expiry]

Rationale;
Bought call cost $3.40 with 11 months expiry = $0.31/per month/cost
Sold Call @ $0.40/higher [income] provides arbitrage profit of $0.09/month
[not including expenses in this example]

So, based on this scenario, what is a rational way to assess the risks?

jog on
d998

 

[wayneL]

Hello Wayne,


So, what was the final outcome of this trade? How did it end up, I’m curious?


Regards


Magdoran

The strategy is still going as I'm still long the $50 calls.

I'm still to do the paperwork, but as an overview if what transpired after the gap.

I had a choice of superimposing a ratioed strangle over the top or delta hedging by buying stock if it looked like moving higher. My view was that it would dribble back to ~$40 before expiry, so elected not to do the ratioed strangle.

That view was wrong and had I have done the strangle, the strategy would have finished in profit with no further action.

The contingency plan was to delta hedge with stock if the underlying started heading north which it did on 24th July. These trades pushed the overall strategy into modest profit by August expiry.

I held the $50 calls and these are going well.

Scoring myself:

Initial implementation - 3/10 due to the mistake in calcs

Management 6.5/10 - It's gone reasonably well but not without a degree of luck. Should have done the defensive strangle. This would have been more in keeping with the goal of the trade.

Should have been done completely differently.

 

[wayneL]

et al

And while we while away the hours, a little Options strategy that requires a rigourous risk analysis;

*Buy long dated Option [11mths expiry]
*Sell short dated Option [1 month expiry]

Rationale;
Bought call cost $3.40 with 11 months expiry = $0.31/per month/cost
Sold Call @ $0.40/higher [income] provides arbitrage profit of $0.09/month
[not including expenses in this example]

So, based on this scenario, what is a rational way to assess the risks?

jog on
d998

Duc

The risks lay in the difference in gamma between the front month option and the back month. This means the strategy has the potention to develop unwanted delta if the underlying moves too far away from the strike price.

There is also a potential vega risk. If IV drops, your back month long option will drop in price and you will get less premium on the front months. This coulsd also work in your favour as well.

It's a good strategy in the right circumstances but some management could become necessary if the underlying starts moving.

Cheers

 

[dutchie]

G'day Wayne,Sails & Magdoran

I was wondering what the best way would be to start plotting implied volatility for a share (ASX).

1. Use the ATM Call value at the e.o.d. for the current month?
2. Get the volatility value from the ASX site ? or
3. Get the last price of the ATM Call option on the day and put it into the Black-Schooles formula from Hoadley site and work out the IV?
4. I know different strike prices would have different IV's but as a average value (especially to compare the changes of IV day to day) the ATM value is the best bet?
5. Would it be better to plot the average of the last "x" days?
6. When it was close to expiry date would it be better to jump to the next month?

Cheers

Dutchie

 

[sails]

Hi Dutchie,

I just use WebIress and find it generally matches up OK with Hoadley. There is the occasional unrealistic spike that shows up but if it's only one day, I don't put too much weight on it, but find it is good enough for my needs. It shows if IV is at it's extremes and which way it is trending.

There are some free demos of WI around that have IV charts - http://www.traderdealer.com.au/clients/clients.php
http://www.morrisonsecurities.com/int_trading.htm

Just type the code + IV (eg BHPIV) into the code field on a chart and you can choose from daily, weekly, monthly, etc time frames. I see that htmlIress also has IV charts available - it's an alternative if you have difficulty in loading up WI.

Cheers,

Margaret.

 

[Magdoran]

G'day Wayne,Sails & Magdoran

I was wondering what the best way would be to start plotting implied volatility for a share (ASX).

1. Use the ATM Call value at the e.o.d. for the current month?
2. Get the volatility value from the ASX site ? or
3. Get the last price of the ATM Call option on the day and put it into the Black-Schooles formula from Hoadley site and work out the IV?
4. I know different strike prices would have different IV's but as a average value (especially to compare the changes of IV day to day) the ATM value is the best bet?
5. Would it be better to plot the average of the last "x" days?
6. When it was close to expiry date would it be better to jump to the next month?

Cheers

Dutchie

Hello dutchie,


Implied Volatility (IV) is a tricky beast. How you determine how to use it depends a lot on what you’re trying to achieve, and what your preferences are since there are many different ways to look at it. Wayne, Margaret, NetAssetts, and other contributors will all have their own approach to how they interpret and use IV.

Model:
Determining which model you use can also make a difference in some cases, a lot again depends on what you’re looking at. I use Binomial/American exercise for the ASX, but have to set the number of steps to around 25-30 or else my PC chugs (Have 2 gig ram, and 32 HT etc and it still chews up the cpu if set to 50 steps).

Black and Scholes has some distortions in the model, which become evident with some calendar spread value returns which are incorrect, so just be aware of this. Also, Black and Scholes was designed for European exercise hence it returns values that doesn’t take into account the theoretical added value for American exercise.

IV:
IV average is exactly that, the average for all the strikes at different levels and expiries, so it can be a little misleading to use it as your benchmark in many instances. Also note that dividends can move the IV for calls down, and IV for puts up nearing ex div.

I change the focus of my IV estimation depending on what I’m doing – which strategy I am looking at, what the time frame is, and what expiry time there is in the options I’m looking at, what the constituent parts are (calls/puts, ATM/OTM/ITM, & expiry).

For example, if you’re looking at long term options, and only calls, you may want to compare the 90+ IV averages, average IV for all calls, the overall IV average, and then compare the same strike in different months, and all the strikes in the same month.

I factor in where the current IV is in relation to the range in the appropriate time frame. Say you expect to be in the trade for a month, you’d probably look at the current month, and maybe 3 months out. If you expect to be in the trade for 0-7 days, you may only want to look at the current month. Say you expect to be in a trade for 3 months, you’d probably look at the past 6 months.

But this varies a lot depending on your judgement. A lot depends on your view of the underlying, and the way that volatility is trending itself. I actually think you can read volatility charts just like you can standard OHLC underlying charts, although how you look at them is a little different. In a way you need to correlate the underlying movement with the respective IV movement.

I tend to ignore last prices, and focus on the model price, but this is a personal preference. I look at the way the underlying is trending, and try to estimate where IV may move depending on future movements in the underlying.

Generally, strong down moves in the underlying tend to increase IV (sometimes significantly). Strong up moves can too, but not always. Small inside days and prolonged sideways movement in the underlying or gentle trends tend to see IV move down. The expectation of news and rumours can make IV spike up, and when the item is known, cause it to spike back down again, depending on what the underlying does.

IV can differ for calls and puts for a variety of reasons. Also, activity in the front months (less than 45 days time value) can really swing IV values around (more so in the US than Australia). So, if you’re trading 60+ days, you may find the front month IV irrelevant to your strategy. The core point is to find information that is relevant to what you are doing.

If you’re doing 2 or more legs, you’re looking for favourable skews where you want to sell higher IV and buy lower IV. You want the later IV movement for your positions to move as favourably as possible. If for example you’re looking at low volatility entry spreads such as reverse ratio spread calendarised puts and calls as one unit (sell OTM lower number/ratio calls and puts in the front month, buy higher number/ratio of calls and puts in a later month closer to the money), volatility becomes critical.

But any of the approaches you suggested, or the ones I’m mentioning here, or the ones others may venture later, are all worth considering, and the more you trade, the more you’ll find approaches that work for you depending on your broader approach.


Regards


Magdoran

 

[wayneL]

For any of the un-dead who awake after sundown to trade the Evil Empire:

US Stock IVs

http://sigmaoptions.netfirms.com/IVcharts/stockIV.htm

Futures IVs

http://sigmaoptions.netfirms.com/IVcharts/IV.htm

Cheers

 

[potato]

for asx options traders, where do you get your volatility charts....

 

[sails]

potato, check out post #54 in this thread - that's where I get mine

 

[potato]

thanks sails, i was skimming this forum and didnt see it.

 

[Fox]

Hi Wayne,

I'm trawling through old threads on volatility and stumbled across this one. There's so much for me and other newcomers, to learn from this thread. Unfortunately, the images in post #1 are no longer available (ie. appears as a broken link). Would you, by any chance still have them? If so, I would be very grateful if you can post them here again or refer me to a link where I can access them. Thanks, Wayne.

Fox.