Halo everyone, I am a beginner in trading options and I am now learning in how to calculate the expected range based on volatility and random walk. However I found it difficult as I don't really understand the actual math needed for the calculations . Wish I can get help here thanks!!!
I'm not an expert on the math and I find estimates work better for me. What I do is take the square root of the number of trading days in a year. Let's say 252. The square root of 252 is 15.87. That implies daily moves of around 1% for each 15.87 in Implied vol. If I see the ATM call/put trading at a IVOL of 21, I'd expect the stock to move on average about 1.32% per day. I'm sure someone else will have a better process. That worked well for me. Bob
Thank you Robert ^^I wanna ask about the significance of the correlation i.e. Is it significant to calculate the expected range by multiplying the daily volatility derived from the above calculations? Also, how do you determine the trend ? My fd suggested point and figure chart of the index future to determine the trend but I have no idea on this issue. Moreover, how can I calculate the percentage of emerging the calculated expected range? Thank you^^
I was an option Market Maker for 25 years, but my skills were not mathematical in nature. I used these values in a general form to make decisions. When option markets became electronic with multiple markets, I had to decide if the current NBBO was something I expected was hig. low or fair. The simple math above was one way for me to have information to make a decision. From that, I have no process to determine the trend or correlation to other assets, if that is what you are asking. As an example, of two symbols both have a IVOL of 23.50, that does not mean they are correlated, or not.