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Strategies & Market Trends : Options 201: Beyond Obi-Wan-Kenobe
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To: tyc:> who wrote (745)2/23/2003 12:22:20 PM
From: Dominick  Read Replies (1) of 1064
 
Fair Value is far more likely to be based on the implied volatility of the option than on the actual historic volatility displayed by the stock price over the last 50 days.

I have Ken Trestor's Option Trading Course and my understanding of it was that he didn't place great emphasis on IV because it was the current view of the market maker.

However he did value HV over IV for determining FV due to the known past min & max range a selected volatility MA could travel, and where the MA is positioned now with relationship to the past min and max numbers. But it was important to know the relationship for both IV and HV. If IV was less than HV, the option was considered undervalued.

The onechicago site I mentioned shows the HV chart plus the min and max percent of the various time lengths. It is the volatility MA of prices not of puts and calls.

Using AEM as an example:

Using a 50 MA of volatility for one year, the max 50 ma was as high as 89% and as low as 43% and is currently at 58%.
So it's currently about the middle of the min/max range. It could go either way from there.

You can crunch the numbers to find out what would happen to your straddle prices if it would increase or decrease.

Ain't this fun?

Dominick
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