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Strategies & Market Trends : Swing Trading With Options
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To: underdog430 who started this subject8/8/2001 5:46:19 PM
From: underdog430  Read Replies (1) of 88
 
Volatility

A Business Week article (08/13/01) titled "A Deep Freeze For Options" discussed the recent volatility saying that the "volatility crunch has hammered option traders with losses and threatened to put them out of business." This strikes me as unlikely. We all know that volatility fluctuates up and down and the current levels of volatility don't seem to be extreme or all that extended. What I found more interesting about the article were the explanations for why volatility might be low.

First, foolish option traders got overly aggressive when volatility was high and are currently hiding under a rock somewhere. OK, that's kind of like saying volatility is so low because it was so high and that's kinda sorta correct.

Second, zero-coupon convertible bonds are dominating the markets. It isn't clear if this is supposed to mean that people are using convertibles as proxies for options or simply instead of anything else.

Finally, regulation FD has dampened historical volatility and so of course implied volatility goes down as well. They cite a USC study to support this claim but I'm a bit skeptical. It really does seem that Reg FD has increased volatility, with more big gaps, but even if that it isn't true it seems really unlikely that it has caused volatility to decrease.

"The Striking Price" column in the recent Barron's (08/06/01) seemed a bit more calm about things. While saying that the volatility has been dampened by the current popularity of zero-coupon convertibles, it mainly suggests that this is just August, historically the quietest month for options.

Just trying to keep things in perspective.

Mark
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