Vote for Lindsay

OK the markets took a big dump today, wish I had some open puts. Luckily I mostly cash waiting for a pull back - I did not expect this kind of a pullback though. Now I am going to sit out the week and wait for the dust to settle.

So to make this a more lighthearted post - Have you looked in the lower right hand corner of this website? I hope you have and I think it has been a great addition to my site. Wallstrip is hosted by Lindsay Campbell. It is a great daily show that I watch faithfully, for two reasons - its funny and Lindsay is ummm…HOT!

So I have casted my vote for Lindsay at this poll VLOG Hot: NewsBabes

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Historical Volatility vs Implied Volatility

Remeber the chart of Administaff (ASF) from yesterday - Chart provided by Big Charts

Well the Historical Volatility from the past 30 days is 77.12. This is an account of the average deviation from the average stock price over the last 30 days. Notice the big 10 point gap, this contributed to the higher volatility for this stock over the last 30 days.

Now the important one Implied Volatility - Implied volatility is a guess! It is an estimate of what the fluctuation in price of the stock is going to be in the near future. Implied Volatility is used to price options using the Black-Scholes Model.

So how do we use this? Well we want to buy low and sell high using implied volatility. If we know that Implied Volaitlity is used to price options and that it is used in the time value part of the option price vs the intinsic part, we can tell if an option is priced high or low based on the implied volatility.

If the implied volatility is high then the option price or premium is higher. If the implied volatility is low then the option premium will be lower. So using the volatility method of trading we would want to enter trade as such - if the option premium is high we want to sell or write options. If the option premium is low then we would want to buy the option.

So first how do we know when the Implied volatility is high or low?
You compare it with the Historical Volatility. For example for ASF (NOW DO NOT TRADE THIS! This is for example purposes only. Do not trade!) the current Implied volatility for ASF is 26.94 which is lower than the historical volatility of 77.12, so if we were interested in trading this, we would be looking to buy options not sell them.

Conversly if we had a stock with a historical volatility of 20 and the implied volatility was 30 we would be looking to sell options.

SO how can we use this in the real world of trading?
If we were looking at a trade and thinking of purchasing a call, we could look at the implied volatility and a volatility chart to determine the exact timing to place a trade. For example if the volatility is coming down it may be prudent to wait a couple of days for the trade so that you are not buying overpriced options.

An example with a chart coming soon, but next post on this topic will be using volatility to your advantage while trading earnings!

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Volatility

Trading on Volatility is a simple concept and one you already should know - buy low and sell high. In the next few teaching posts I am going to discuss trading on volatility and the basic concepts behind it.

Lets start out with what it actually is…

Volatility is a statiscal analysis measurement of the variability in price of a stock or index. Meaning it tells us how much the price fluctuates over a given time period. The higher the volatility the more fluctuation expected to occur in the price of a stock or index.

For example - Right now the volatility of Clear Channel Communications (CCU) is around 10
Take a look at this chart of the stock price. Chart provided by Big Charts

Notice the price is flat and not a large amount of fluctuation.

Now check out - Administaff (ASF) with the Volatility around 70

Notice the large gaps in this stock in the last six months and until recently the daily stock range was relatively big.

Tomorrow.. Historical Volatility vs Implied Volatility

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Alpha Trends

Thanks to Pete Stolcers from One Option for refering Alpha Trends

I went to this blog and found free videos on Technical Analysis. Brian does an excellent job and provides insight almost everyday through these videos. Definitely need to check this out!

Here’s the video from Thursday Video Technical Analysis Review 2/22/07

He made a spot on my sidebar links.

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