Ok, I see. Since the fish will strive to stay positioned relatively the same to its closest neighbors find the fish who are out of sync with others in the immediate area. The idea is that they will return to the proper position. John
I have always thought that the technical analysis is limited to the price/time/volume relationship. If you consider building mathematical models of human behavior using other than the price/time inputs being a part of technical analysis then there is no argument. However, there is a big fundamental difference between traditional TA and cybernetic models. They use way higher number of uncorrelated inputs and have strong feedback loops that constantly adopt them to real time conditions. The reason why âsetupsâ always have limited life is because their complexity is usually less than the complexity of the environment they live in (Ashbyâs requisite verity principle). It makes them unstable and very limited. Option chains give the needed complexity that none of the traditional TA could possibly give simply because they have magnitudes higher variety. Also, there is no âscanningâ involved in my methods. I use singular models for singular securities. My criticism of traditional TA has been always directed to the fact of its severe limitations. In other words, it is very difficult to make sense of what is going in the room by just peeking through a key hole. Fibonacci levels are also conventionally used in a very primitive, literal way therefore they are not better in this respect than any other line drawn on the chart. But, if you use them as a natural gravity centers you will realize that the distribution of the prices around them is different than around any other line. Fibonacci ratios exist in option chains as well, but they cannot be literally used. Seeds of the sunflower are always arranged in the Fibonacci spiral pattern yet no one can predict where the particular seed will appear. General population has severe limitations in understanding of probabilities models thus constantly demanding clear causality to feel better about them selves. Humans always look for patterns in the places where they do not exist and miss the obvious patterns because they treat them literally. Oh, well.
The implied volatility is what move the stock will have to make to get to the strikes in the time allotted. Spy is at say 80. 80 is closer to 95 then 60. The implied volatility is higher on the 60 since it will take a bigger move to get there, 20 vs 15. John
This seems like a nice theory but again, it doesn't hold up to even a cursory analysis. At this moment, SPY is about 83. The 82 puts have an IV of 48%. The 95 calls have an IV of 31%. Does it take more volatility to move 1 point to 82 than 12 points to 95? Take a look at that skew and you cannot miss the obvious and perfectly consistent pattern where each strike trades at an IV higher than the strike above and lower than the strike below. That has nothing to do with the market's prediction of volatility.
Why do I get the annoying feeling this is a quiz question and not a real question? I've seen some of your posts before, I think you know this! But I'll answer you anyway to avoid having to read through pages of silly guesses to get to the good stuff. Vol skew comes from using a model that assumes normally distributed returns on an asset with a non-normal return distribution. If the return dist was normal then you could have the same implied vol at every strike . But since stock returns have a greater probability of a large move down than a symetrically large move up, low strikes need to have higher implied vols than high strikes. This is the impact of skewed returns (smirk), there is also a distortion from fat tails(smile).
This is a common belief but I don't think it is true. There is a study that uses some short sale difficulty measure to test this and finds no relationship. I think they used stock loan rebate rates but I can't remember for sure. I'll look for it later if anyone is interested. Another idea I have heard is that violations are related to changes in the value of voting rights, but I am pretty skeptical of that story. BTW, what do you consider persistent?
Not to be an ass, but these "violations" only occur in listed markets. Why is that? It's due to regulatory or investor intervention. Either the regulator puts a restriction on the short or the client takes possession of the security on loan. Voting rights? Comical. Persistent, anything beyond one trading day in duration. I must admit, this place is far more lively than Wilmott.