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Brief Overview
What is the Volatility Index?
Market tool for investors Def: Index of implied volatility of eight put/call options, near the money and second near the money, for two stated strike prices given by the S&P 100 Options Index (OEX) Ticker symbol is VIX Continuously quoted throughout each trading day Provides accurate estimate of short term stock volatility
Volatility: An Overview
Volatility comes in two basic varieties:
Historical Volatility - measure of standard deviation of past daily returns during a specific time period . It is a published figure that can be found on almost any stock that contains options Implied Volatility - Combination of supply and demand, along with the investors estimates. Allows options to be compared in accordance with six variables. It uses current market values to be calculated. Lets look closer ...
Implied Volatility:
WHAT IS IT?
Y = 3x + 2 Solve using X = 3 we get Y = 11 But what if you were given the Y value ? Work backwards and rewrite the equation to solve for x X = (Y-2)/3 Given any Y , we can now solve for X
V 1 2 2 2V V S rS rV 0 2 t 2 S S
For Implied Volatility we rewrite the equation solving for s, taking our value of C from the OEX Index Option Price This generates a value of Implied Volatility
Second-near-the-Money
E1 = Exercise Price below current value E2 = Exercise Price above current value + one call at E1 + one put at E1 + one call at E2 + one put at E2
Interpolate between the near and second-near implied volatilities to get an At-the-money volatility avg
Developed Strategies
Most reliable strategies with short term stock options An increasing VIX means the stock market is experiencing large, traumatic declines, which is a signal for buying opportunities.
Purchase Deep-in-the-money calls or sell both calls and puts
Declining VIX means stock market is stable and it is virtually impossible to predict future changes
Purchase of puts is least risky strategy
Questions????