If you are an operator of long option premium, volatility is a necessary element for success. In the absence of volatility, time decay (Theta) will this challenging financial instrument (or even more difficult) one. These days, volatility is not needed. In fact, volatility is thriving. For a long trader premium options, there is nothing to do with market tailwinds that the benefit of its strategic options.
With a market that has gained 20% since March 9 and funds has fallen more than 3% intra-day today (from the time of publication), 2009 has obviously been extremely volatile one years to date. This year seems to be even more volatile than 2008, which we figured was the most consistent high level of daily volatility in recent decades. In 2009, there has been a lot of sessions that have seen stocks rally and fall in a significant percentage. It seems almost a truism that the Dow Jones Industrial Average is up or down at least one percent.
Volatility can be defined in many ways (ie, implied volatility, volatility statistics, etc.) – in this analysis we look at the volatility of the number of occurrences of the Dow Jones Industrial Average rose or fell by one percent or more on a basis Closing on a trading day. More specifically, we consider the absolute performance for the Dow Jones Industrial Average, for each day that goes back to 1928. We then calculated the number of occurrences (and percentage) that the Dow Jones Industrial Average finished up or down more than one percent in a year determined.
Below is a chart of the percentage of days each year when a market move one percent or more. Two points stand out (1) the increase in volatility has skyrocketed since 2006 (from 10% to 64%) and (2) the current level of volatility of rivals only the beginning of 1930, when it reached a maximum of 74% volatility.
DJIA daily 1% Move Chart (as of 3/9/2009)
In 2008, there were 134 incidents of 253 trading dates (52.96% of days) that saw the Dow Jones Industrial Average finished up or down one percent. This compares with that of 2004 and the Period of 2007, which took an average of four years of 15.61%. This results in only 40 days per year in that four year stretch in the Dow Jones Industrial Average fall or rise by a percent or more.
2009 has been accelerated in 2008 has left. Our analysis was through 9 March 2009 – after that date that were aimed at an astonishing rate of 64% of the time the Dow moves more than 1% on a daily closing basis. If volatility continues through the last nine months, this would be the most volatile market consistently since 1932, when the Dow Jones Industrial Average was up or down one percent 74% of the time. From 9 March, there has been no respite from this trend because about 10 of the 14 days (or 71%) move in this type (of the nearly 27 March). So the rate% for 2009 is actually slightly higher than the 64% used in the above table.
For players of the long option premium, the volatility of this type can be a blessing. Buying calls, puts, straddles, and strangles can be advantageous in this environment. For the "buy and hold" investors and securities investment funds, this volatility can only be digested with a six pack Dramamine and Pepto Bismol.
Other players to take long option premium is that the level of volatility we've seen can not last forever. periods of high volatility in general, will lead to lower, as these periods tend to cycle in and out. This trend is likely to enter a latent state with reduced volatility and lower price fluctuations (although the explosion in the growth of ETFs, options, Ultra-ETFs, etc., can reduce the decline in volatility in some way).
So with an arsenal of strategies for options beyond the choice along the premium (which is always useful) is even more important when volatility decreases. Learn to trade credit spreads vertically, condors, iron, short straddles, short strangles, put it in writing covered calls is important to add to our repertoire.
About the Author:
Moby Waller first worked with Price Headley in the mid-90′s doing research and options analysis. He then moved on to the CBOE where he was a market maker in the AOL pit during the boom of the late 90′s and turned $100,000 into over $1 million in about 2 years. Later he moved on to trading European Index Options from “off” the trading floor in London, England.
Article Source: ArticlesBase.com – 1930s Volatility is Here
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