As part of easing into Aussie options I want to go through some of the things I looked at with US options. Analyze some stocks and collectively put on some dummy trades....hopefully to everyones benefit.
The Oz options market is different and I am going through a brand new learning curve.
So what I want to do is put in my $0.02 and see what you all think, and you can put in your $0.02 and see what come out.
I'll explain a few things for non option traders and make it basic so the most people can follow along, but I'll presume at least some knowledge.
I'm a firm believer in considering volatility first before considering the strategy, whether directional or not.
So what is volatility? Volatility is simply how much an instrument (stock in this case) bounces around in the market path.
In the options market their are two types of volatility:
1/ Statistical or Historical Volatility (SV) - This is the actual measured volatilty over a specific time frame in the immediate past.
2/ Implied Volitility (IV)- Is the markets view of the possible volatility in the immediate future. Basically it's a guess.
SV looks back, Iv looks forward.
How is it measured?
SV is measured in various ways (standard deviation, Average true range etc) but option SV is measured in a specific way. The lookback period is usually 20 trading days and expressed as an anualized percentage. The metamumble (or amibroker) equation is:
(Stdev(Log(C/Ref(C,-1)),20) * Sqrt(252))*100
IV is an input into the "Black Scholes Option Pricing Model" (or similar) and is used as an input to create a price for an option (along with price of underlying, strike, expiry etc), or it is reverse calculated using algebra, when a price in the market place has already been set by supply and demand.