Historical Volatility And Implied Volatility by zulfikarads2010

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									Volatility to an options trader is defined as one standard deviation of
daily price change in one year. It is expressed as a percent. Volatility
is the most subjective variable of the fiveor six inputs necessary to
calculate a theoretical price for an option. The two forms of volatility
are historical and implied.      Historical volatility


  Volatility that can be calculated over any number of trading days
Implied volatility      Volatility that the market place is imputing into
the underlying future, given the current price of the option. The 21
percent implied volatility that existed on November 16 suggests that the
S&P can be expected to remain within a range of 21 percent plus or minus
its current price at the end of a year with about 67 percent confidence;
or that prices will remain within a two standard deviation range with 95
percent confidence. The 21 percent implied volatility seems reasonable
with respect to the most recent band of 20 to 28 percent in which implied
volatility has been moving. When the implied volatility of 21 percent is
compared to the historical 20-day volatility of 161/2 percent, the
options appear overpriced.      The market place obviously does not
expect the S&P 500 Index to be as quiet as it has been. Volatility does
not have a major impact for directionally biased vertical spreaders.
Therefore the 21 percent implied volatility reading for the at-the money
S&P 500 futures options does not force a trader into a particular spread
strictly for volatility reasons.       Upside Breakout: Remove One-Half
of Losing Leg      An upside breakout from the larger Head & Shoulders
Bottom on the Dec S&P 500 chart occurred on Friday, November 30. Volume
expanded to 72,396 contracts, confirming the validity of the breakout.
The minimum upside measuring objective is 354.25. Aggressive traders
should remove one-half of the losing leg of the vertical spreads. This
entails buying back 50 percent of the call options that were previously
sold short. The long 320 versus short 325 Dec S&P 500 call spread will
continue to be used as the example. If a pullback (prices decline) to the
larger neckline occurs, the remaining (one-half) short call position
should be covered. This would leave the trader in the most bullish
options condition long calls. Note that the strategy matrix states that
the ideal technical situation for a long call position is en route to
price pattern measuring objective after pullback has occurred.
Risk/Reward Parameters of New Position      After every modification of
an options strategy, the trader must be aware of the new profit or loss
characteristics. A simple method of constructing the risk/reward graph
involves creating a profit/loss. Using a spreadsheet format, a trader
lists the individual present positions and the costs involved in getting
there in Column A. Possible values at expiration (both above and below
the spread strike prices) head the remaining columns. Each cell entry is
calculated and the resulting outcome is tabulated in the bottom row.
Graph paper of similar scale to the chart of the underlying should be
used to plot the possible outcomes.It is obvious that this new position
of long more calls than short is much more aggressively bullish than the
original position. Above the upper 325 strike, the options position acts
(at expiration) like a long S&P 500 futures contract.     Tips to turn
$1000 into $1,00,000, articles on stock market trading and investing. To
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