Secret 56THE KEY TO OPTIONS ANALYSIS
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When you are trying to measure the fair value of an option
and your probability of profit, there is one intangible factor that
must be determined: the underlying security or futures volatility.
What will the volatility be in the future? The volatility is a
measure of how much the stock price or futures price will fluctuate
or move up and down.
Many computer programs will require this historical volatility
or calculate it for you. The historical volatility or statistical
volatility is a standard deviation of change in price over a set period
of days and weeks.
Professionals on the floor of the exchanges use a very short
term volatility of between 20 and 30 days due to the fact they
hold positions for very short periods of time, sometimes as little
as a few hours to a few minutes. If you plan to hold option positions
for longer periods of time, you should use a longer term
historical volatility (i.e. 100 days or 20 weeks).
Historical volatilities are available on the web in a variety of
locations, such as ivolatility.com . Once you have a good historical
volatility, it is easy to measure the fair value of an option.
When you are trying to measure the fair value of an option
and your probability of profit, there is one intangible factor that
must be determined: the underlying security or futures volatility.
What will the volatility be in the future? The volatility is a
measure of how much the stock price or futures price will fluctuate
or move up and down.
Many computer programs will require this historical volatility
or calculate it for you. The historical volatility or statistical
volatility is a standard deviation of change in price over a set period
of days and weeks.
Professionals on the floor of the exchanges use a very short
term volatility of between 20 and 30 days due to the fact they
hold positions for very short periods of time, sometimes as little
as a few hours to a few minutes. If you plan to hold option positions
for longer periods of time, you should use a longer term
historical volatility (i.e. 100 days or 20 weeks).
Historical volatilities are available on the web in a variety of
locations, such as ivolatility.com . Once you have a good historical
volatility, it is easy to measure the fair value of an option.