Options Trading — Adam’s Options — iBankCoin

So if SKF is the new Fear Index, how about volatility on that Fear? And better still, longer term anticipation of the volatility of Fear?

Here’s a chart of 90 day normalized options volatility on SKF (the lower one), basically an October option now. And yes Houston, we have record numbers here.

Again, this pup essentially doubles XLF volatility, so keep the absolute numbers in perpective.

Here’s something bizarre though. If you watch pretty much every tick here, as I do now, you would expect shorter term stock volatility is at a record too.

Oddly, no. The higher chart shows 10 Day historical volatility, i.e. the volatility of the stock itself over the past 10 days. And that’s rising, but well off the March highs. In fact, the Oct. options are assuming the extraordinary stock volatility we see right here, right now will persist for 3 more month’s.

Now no reading is perfect. I suspect the 10 Day calculation underestimates the volatility you see actually trading this thing now. It only considers the day’s range, not the way it got there. So in other words a 20 point range in one direction goes into the calculation just the same as a 20 point range that saw SKF round trip up and back 10 times from high to low. But the pattern is closer to the latter than the former. Yesterday for example SKF went up 20, then all the way to down 10 before finally closing up 10. The range was 30ish points, but the round trips felt like 70 points.

Still, this all won’t last forever. I have no position after Friday. But If I want to buy paper, I will look at the nearer month’s, and if I want to sell it, I will look out in time.

This entry was posted on Wednesday, July 16th, 2008 at 8:22 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.