Educational Reading Links

8:27 AM killnine

Good readings for trading education:Van K. Tharp in IITM.com: Understanding Market TypeLibby Adams in IITM.com: YOU are the Holy GrailAfraid To Trade: Revisiting Stop-Loss and Profit Target Affect on Win RateThe Stock Bandit: Patient ProgressSwing Trade Stocks: How to Get More Winners by Combining Chart Patte...

Volatility Smile and Volatility Skew � Part 3: Why Volatility Smile and Skew Happen

2:20 AM killnine

Go Back to Part 2: Understanding Volatility Smile & Volatility SkewWhy Do Volatility Smile & Volatility Skew Happen?As mentioned in Part 1, in more recent years, Volatility Skew pattern are more commonly observed than Volatility Smile pattern.For Call options, the Implied Volatility (IV) typically displays a Volatility Skew pattern, whereby IV is the highest for deep ITM options and then is decreasing as it moves towards OTM options.As discussed earlier, traders/investors are willing to buy an �expensive� deep ITM Calls because they can be used as a leverage tool to gain higher % return with lower capital, as compared to invest in the stock itself. Since deep ITM Calls have delta close to 1, they works like stocks, moving almost dollar for dollar with the stock price, but with much...

Volatility Smile and Volatility Skew � Part 2: More Understanding

7:17 AM killnine

Go Back to Part 1: DescriptionWhat Do Volatility Smile and Volatility Skew Mean?As you know, an option�s price comprises of Intrinsic Value and Time Value.In options pricing, there are 6 factors that affect an option�s price: option�s strike price, underlying stock price, implied volatility, time to expiration, interest rate, and dividend.An Intrinsic Value of an option is determined by the option�s strike price and the underlying stock price.And the major determinant of option�s Time Value is Implied Volatility and time remaining to expiration.Since Implied Volatility (IV) represents an estimate of future volatility, this factor is the most subjective. Therefore, Implied Volatility has been used by the market makers to �manipulate� the option�s price in order to balance the demand vs. supply...

Volatility Smile and Volatility Skew � Part 1: Description

6:50 PM killnine

Previously, we�ve talked a bit about Volatility Smile and Volatility Skew in this article.Basically, Volatility Smile and Volatility Skew show that even for the same expiration month, Implied Volatilities (IVs) can vary by strike price.We can get Volatility Smile or Volatility Skew charts by plotting the IV values of options for the same expiration month across various strike prices.For some options, given the same expiration month, the IVs of In-The-Money (ITM) & Out-of-The-Money (OTM) options are higher At-The-Money (ATM) options.As a result, when the IVs for various strike prices are plotted into a chart, it would take shape approximately...

Good Reading Links

8:37 AM killnine

Good readings for trading education:Vix & More: What Is High Implied Volatility?The Stock Bandit: Stop Loss DiscussionThe Stock Bandit: Trading Video - Tips on Trading BreakoutsRay Baros: Thinking �Three Moves Ahead�...

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