VOLATILITY......the big dog
Buy low volatility-Sell high volatility
Volatility can make or break your trade regardless of price action
Your options broker will have volatility charts for you, but what if we want to do some technical
volatility studies ?
historic volatility , just pull
up your favorite charting program, add Bollinger Bands and Standard Deviation and possibly Average True Range. This is historic
volatility. Its simple.....how volatile is the market now.....in respect to X periods.
OptionXpress has a great charting platform called FLEX charts, they offer many volatility
indicators:
Chaikin volatility
HistoricVolatility
Relative Volatility Index
and others
Other volatility studies are available at:
Implied volaility is a little more difficult:
Your broker supplies charts of implied volatility and there are a few websites that supply
studies on implied volatility such as the one listed above.
Since implied volatility is the markets assement of the FUTURE VOLATILITY of the underlying
we can simply read it off the option chains.
Each option contract has its own volatility and is priced accordingly, by seaching the option
chains, it is readily evident which way the market (buyers and sellers) expect the underlying to move. This could be reffered
to as SENTIMENT.
IMPLIED VOLAILITY = SENTIMENT
What the market expects will happen.
CONTRARIAN trading theory states that the market is more apt to move against the majority.
And in my limited experience, it usually does.
Question: Do we trade with the majority or against the majority ?
Answere: YES
Utilizing my OUT OF THE BOX trade:
1) say the market expects an upward move
2) we are neutral to bullish with a possible short term downward move
3) we sell a front month call putting us against the
majority
4) we buy 1 or 2 months out calls, putting
us with the majority
Now we're on both sides, kind of like a politician.
If the market moves up , our 2 long calls will have more value than our 1 short call.
If the market moves down , our short call will gain value and our long calls will retain
much of their time value.
The best scenario would be for the market to move down (contrarian theory) and then move up
(after front month option expiration).
In this way , the market would screw the most traders, and
that is what the market is best at.
Good thing we're not stupid.........................
losing money is always easy:
price starts to move up: you buy back the the short call for a loss
price moves back down: you sell the long options for a loss
A creative person can find a way to lose money.
Using my trading methods making money is far easier than losing money. Turning a profit
is stress free and way more fun than constantly fighting the market. However, you must apply the effort necessary to learn
and understand these methods.
As far as the laws of mathematics
refer to reality, they are not certain, and as far as they are certain, they do not refer to reality.
Albert Einstein
