you're basically wrong on this assumption. also i was using implied not historic vol. it's pretty conclusively demonstrated that implied volatility is the best estimate of future actual volatility. sure, you can always point to exceptions but if you trade long enough you find this to be true. that doesn't mean you should stop trading but if you think you can outguess volatility your in the same boat as someone trying to outguess price direction. i'm not sure you understand the concept of computing odds. you need no samples to determine the odds of winning the lottery. options are different in that the odds are something of a moving target. but given known market factors and price you can make reasonable guesses. options prices are as directly related to probability of success and odds as are the prices on a tote board at a race track. i'd say "guts" is negatively correlated with trading success. it's one of those phantom characteristics that's called guts if you win and stupidity if you lose. short term success SHOULD be attributed to luck. long term success can only be attributable to skill.
Very good point. Anyone can luck out on an option play, such as GOOG just now. I lucked out last year with GOOG (guts), got burned 6 months ago (stupid), stayed out this time (no guts).
Vols held due to this monster $40 move in the shares, well >3sigma. Last quarter the atm straddle got decimated on the report. IIRC, it was quite a bit more than $.30 per contract. Implied vols dropped 1500basis last quarter on the news. You would've lost your ass if not for the $40 GOOG lottery today. The loss would've equaled $8.00 per contract if GOOG had recorded a net change of $10 or less, post-release. You're wrong, luck had a lot to do with it, ignorance of vega risk played quite a role as well.
D-V One standard deviation away from the mean in either direction takes in 68% of occurences. Two SD's in either direction 95% and so on. You don't halve the probabilities when looking at a directional probability. I'll bet my dog's dinner on it. It's strange you get exactly half the probability figures in Hoadley. I've ran it through there and got what I expected, see attached.
I think one should build a GARCH model for volatility. This would help the forecasting of a potential move and add more relevance to a simple probability calculation.
(G)ARCH is a waste of time. It doesn't take into account upcoming events like earnings, trading updates, major economic news and so on. For that you need the subjective human touch.
ah i see what i did. i plugged in a value for expected return (of +8.5% or the approximate long term return on the index). that does skew the result. thanks for pointing this out.
if one belive in perfect option's pricing theory ( hence , zero expectancy for initial position) , then for any given time period without change in IV it should looks like this : Possible ABS % change = ( ATM straddle premium * Price of XYZ) / 100.
I do not know all these greek guys, but, are you saying that if GOOG had not moved on Friday (instead it closed at 308 - the price it was at when I entered my straddle) that on friday the straddles would have dropped 8.00? On thursday at 12:00PM EST (see my attachment on my original post) the P/C's bid/ask were quoted as follows: Nov 300 P 8.60-8.70 C 17.50-17.70 = Straddle 26.10-26.40 Nov 310 P 13.20-13.40 C 12.10-12.40 = Straddle 25.30-25.80 Nov 320 P 19.20-19.40 C 8.10- 8.30 = Straddle 27.30-27.70 Tell me what what you think the Nov 310 P/C 's would have closed at on Friday Oct 21 if the stock closed at 308. Show me the greek that can prove this. I have attached another word.doc that shows the prices of the NOV p/c's when the stock was 338 (exactly 30 points higher) on Friday at 2:00PM