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Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe) -- Ignore unavailable to you. Want to Upgrade?

To: OX who wrote (2010)	10/28/2000 3:36:30 PM
From: RoseCampion	Respond to of 2241

OX - Yes, on one hand, I of course did "know" this. On the other, I'd temporarily forgotten. :) Actually, to be fair, I assumed that the huge spike in the IVs of the various FO stocks on Wednesday and Thursday was primary because they were experiencing *actual* volatility. I mean, when your're in the middle of price swings like this: bigcharts.com ...it seemed reasonable to assume that the market was in large part taking the huge swings in the prices of the underlyings into account in setting IVs, and only secondarily the uncertainty in JDSU's pending announcement. In other words, I was making a beginner's mistake by thinking that IVs were up only because they were reflecting AVs (actual volatilities), which wasn't at all true. I knew that IV's would fall on Friday after the announcement, but I was amazed when I saw them fall by 50+ percentage points. In retrospect, of course, I shouldn't have been surprised at all. So...that's the second lesson I wanted option newbies to take away from this experience (the first lesson naturally being that IVs are crucial, sometimes even more important than the price of the underlying, which beginners tend to concentrate on more): (1) Always think _very_ carefully and (to the extent possible) without preconceptions as to all the factors that might be involved in both the current and the future IVs on your options; (2) Make sure your positions and decisions fully reflect your best understandings of these dynamics; and (3) Insure that you are protected against the likely changes that will occur in IV; regardless of what the price of the underlying equity does. cheers, -Rose-