The Statistical volatility is not historical at all, rather, it should be the volatility of the stock of the last day (according to Alex Jacobson VP of education of International Securities and exchange). He says that the movement in the price of the stock a week ago (let's say) has no relevance to the price of its option's today. Hence, one should use TODAY's volatility.
Here is what Jacobson says in an interview (I can send you pdf upon request at paperprofit1@mac.com):
Alex: The common method of viewing an option as expensive or cheap is to compare it to some historical measure. We call this historical measure historical volatility. Many people would view options as expensive if current volatility is higher than historical volatility. This, however, is really a bad measure. A better measure would be to compare current volatility. Current valuation to expected valuation. If a stock was $80 a few weeks ago and it's $40 today, is it expensive or cheap. It is clearly cheaper than it was, but it still might be expensive if your view of future valuation was lower. [...]
Dan: High volatility can inflate the price of an option, so that you may be right about how the stock may perform, but
not get a big enough move in the option to justify the risk you've taken.
Alex: Volatility is critical to the short-term option user. You definitely would want to buy options if you thought
volatility would increase. You might avoid buying options if you thought volatility would decline. Also understand that volatility has the biggest impact on out-of-the-money options.
Dan: Like in earnings season or when a takeover rumor has been hanging around for too long, that makes volatility
higher.
Alex: If you bought an OTM option, say a call, and the stock went up with declining volatility the call would fall in
price.
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From this interview, we can conclude that we want to SELL high IV and BUY low IV. As Dan says, during earnings season, IV increases, and options become expensive in realation to the price of the stock which may trade in a narrow range (low statistical volatility). This is NOT a good time to enter a PCCRC. Rather, we wait until after earnings when IV declines and SV jumps with the stock. This is why I choose to pick stocks that jump >10% on earnings. Then, you can examine the reason for the jump, and it should be related to a positive change in the view of the stock, like an increase in earnings guidance.
After earnings, IV declines in most cases, but it will slowly begin to rise again. So as Alex avoid buying options if he suspects IV will decline, in the same way, we would BUY options with the expectation that IV will increase. A company that reported earnings in April, will again report earnings in July, and its volatility will tend to increase by then. Right after earnings, we could sell April-May options and buy July-Augost options in the expectation that IV will increase for my long options whiich are 2x as many as my short front month options. I would enter a PCCRC if I saw the the IV of the short options is the same or larger than the IV of the long options I am buying. I might get assisted by IV/SV charts and by IV/time charts.
In the following video, I am demonstrating the use of Platinum in selecting PCCRC candidates. Even if you don't have a platinum subscription, please stay with it until the end, so you understand the theory behind my post-earnings PCCRC strategy.
http://pathometrix.com/Movies/IV1.mov
For information about joining the private Stock of the Day group, please send an e-mail to Paperprofit1@mac.com
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Sunday, May 27, 2007
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16 comments:
Juan,
the video is not working, maybe you can check it?
dan
It is too large, I am going to have to create a smaller version with a smaller screen. I hope to get it done tonight or tomorrow.
Dear Juan,
RE: "Here is what Jacobson says in an interview (I can send you pdf upon request at paperprofit1@mac.com)"
Please would you sewnd me a copy.
Thank you.
Fortitude42@gmail.com
Juan,
Thanks for the text, and take your time with the editing.
The idea is to buy options with low IV and sell with higher IV. That's understood.
The next question for me is to see if I can get that information in a softare other than Platinum.
Dan
Indeed Dan,
If you follow the "after earnings" strategy, you are likely to have HIGH SV, and low IV.
Next, you take a look at the IV for your short and your longs. The IV of your shorts should be equal or greater than the IV of your longs.
Use TOS to figure out HV(2,262) from the Prophet tab studies (see my video for details). This will give you the CURRENT volatility. This should be HIGH.
With this knowledge, you do NOT need further information, IMHO.
Great Juan, we can see the video.
TOS can help us get the SV chart, we change to 2,262, and we see the change, usually a jump to the roof in the SV. So we have high SV, which tells us that the stock is capable of big moves one way or another.
IV - TOS has the IV for the options in the option chain, in the TRADE tab. There we can see the different IV for options of every month, and also, IV for every strike. We need to know that we want to buy lower IV and sell higher IV for options.
What I don't know yet is how to get the IV/SV chart in TOS. Maybe we can, and we just don't know yet?
You say above that if SV is high that's enough information, but why do you say that? Is it because we don't look for IV/SV ratio to be below 1?
Or, because in that particular day of the SV jump the IV/SV ration would be below 1. no matter what?
dan
Dan: TOS can help us get the SV chart, we change to 2,262, and we see the change, usually a jump to the roof in the SV. So we have high SV, which tells us that the stock is capable of big moves one way or another.
Yes, you change the HV into 2,262... No longer is the name "historical" IV correct, because is only 2 days. You can call it actual or statistical volatility, as per Alex Jacobson afirmations.
The 10% jump is what increases the SV so the IV/SV ratio falls below 1. This won't apply to the "high flyer" system, but that is another issue. Selecting 10% jumpers is equivalent to picking stocks with low SV.
Dan: IV - TOS has the IV for the options in the option chain, in the TRADE tab. There we can see the different IV for options of every month, and also, IV for every strike. We need to know that we want to buy lower IV and sell higher IV for options.
Juan: The IV is reduced after earnings in most cases. Your job is to pick the stock when the IV is curling UP. This is not easy when you have only real time data. A chart is necessary. Although you can compare the IV for short term and long term options, you are missing the last component which is the relationship to previous months. Is the IV low overall? if so, it has a better chance to increase.
Dan: You say above that if SV is high that's enough information, but why do you say that? Is it because we don't look for IV/SV ratio to be below 1?
Juan: If the SV is really high (it will be if you pick 10% jumpers), then the IV/SV will be low. I know for experience that IV declines after earnings, and that it tends to increase before earnings. Picking stocks shortly after earnings and buy options that expire AFTER the next earnings has an increased chance of success because IV will increase (these are Vega gains).
Juan,
WNG is a stock that jumped over 10% today, but was on a acquisition news.
Even if this is at $83, because of this news and jump in price, a PCCRC is not what we look for in this particular case.
dan
ASN
This is another stock that jumped today. The OI is low, but the IV in front month is higher than the IV in the next few months.
This stock may be again a takover story. The news of a takeover is the reason behind the gap up.
Juan: The IV is reduced after earnings in most cases. Your job is to pick the stock when the IV is curling UP. This is not easy when you have only real time data. A chart is necessary. Although you can compare the IV for short term and long term options, you are missing the last component which is the relationship to previous months. Is the IV low overall? if so, it has a better chance to increase.
Dan: If a chart is necessary and if we don't have it in TOS, but only Platinum has it, it may be important to have Platinum for PCCRC system.
What if we play with the date in the TOS analysis tab?
I looked at big movers today, I am not interested in any of them.
Look at the date of earnings, and don't sell options that expire shortly after earnings.
Folks: Try to enter a pseudonym so we don't get so many anonymous!
I will post a video on using the TOS for PCCRC without Optionetics platinum.
The would be useful Juan!!
Dan
I am waiting for you to post a video on using TOS for PCCRC expecially the Risk profie (the invert "B") and how to access the IV/SV ratio using "Prophet".
http://pccrc.blogspot.com/
I found this stock today but all the lines are lifted up. It is very "odd" to me...anything wrong???
Happy trading
Happy, whenever a good candidate comes out I will demonstrate the entry with Prophet/Tos.
Your candidate CDWC is UP because of a takeover. The volatility has dropped to next to nothing. This is no longer a good candidate because you don't expect Vega or Delta to increase.
http://biz.yahoo.com/ap/070529/cdw_buyout.html?.v=9
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