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Strategies & Market Trends : Options 201: Beyond Obi-Wan-Kenobe
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To: Dan Duchardt who wrote (767)2/24/2003 7:56:56 AM
From: tyc:>  Read Replies (2) of 1064
 
>>There is no mathematical connection between BBs and HV

It's not very often one gets the opportunity to talk about any subject with someone who obviously knows what he is talking about. With that opportunity staring me in the face I am not about to crawl back into the woodwork just yet.

I accept your statement above. What I was talking about was Bollinger Bands. Clearly, then I was not talking about Historic volatility. But this does not detract from the usefulness of my observations concerning Bollinger Bands.

Changng the subject from AGE to Alcan, and this time using US$ prices;

stockcharts.com

..This chart shows 50 day 2sd BB's as extending from $26.86 to 32.27, with a 50 day MA of 29.57. Applying my formula we arrive at an annualised "something" of 20%.

..If I now turn to my Qbasic BS program and seek May30 option value with a 20% volatility and a current price of $29.57, I am told that the option value is $1.13, the delta is .5 and a two SD range from the current price is 26.80 to 32.63 .. That is precisely the range of the 50day 2sd Bollinger Bands.

.. Moreover, the delta of the call is .5. If we produce a neutral-delta ratio write by selling two calls and buying 100 shares, the profit range of the position will extend over the same range of values

You can see how easy it is to mistakenly believe that the Bollinger bands have allowed us to calculate the "historic volatility" of the last 50 days. It is NOT HV !!! But what is it ? Whatever it is is just as useful in my option work as HV, which is a concept I don't understand yet.
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