How to Calculate the Volatility of the Spread in Options Trading

August 14, 2010 by  
Filed under Option Trading

In order to be able to calculate the volatileness of propagacià ³ n, we must equal volatilenesses of the options individuales.& #13; First of all, we are going to move of June of calls being moved the implÃcita volatileness of June by 40 to 36, one disminucià ³ n of four garrapatas volatileness. Four volatileness of the garrapatas, multiplied by a fertile valley of. 05 by tick give a value us of $. 20. To continuacià ³ n we reduced $. 20 of June the present value of 70 opcià ³ n of $ 2. 00 and obtains a 36 value of $ 1. 80 to volatileness. Now the two options are evaluated in a base volatileness igual.& #13; As far as this first adjustment in which trasladà ³ the 70 of June of volatileness up to 36 from 40, we have a value of $ 1. 80 to 36 volatileness. 40 August call volatileness has a value of $ 3. 00 to 36. Therefore propagacià ³ n valdrÃ$ 1. 20 to 36 volatilidad.& #13; If you want to move August 70, solicits that, you tomarÃa the fertile valley August of call of 70. 08 and multiply by four the difference of implÃcita volatileness of garrapatas.& #13; This gives a value him of $. 32 that must be añadir to the present value of August of 70 calls with the purpose of to take it until an equal volatileness (40) with 70 June of call. To add $. 32 to 70 of August of call give to 3 dà ³ him lares. Value of 32 in the level of volatileness of the new ones of 40 that is the same level of volatileness that June 40 llamadas.& #13; Now, ours expansià ³ n is a value of $ 1. 32 to 40 volatileness. August 70 calls of $ 3. 32 except 70 June to two the calls of dà ³ lares. 00 to fix the price of propagacià ³ n to 40 volatilidad.& #13; ³ n does not make any difference of opcià that to move. The point is to establish the same level of volatileness for both options. Then already estÃready to compare apples with apples and the options to the options for a value of propagacià exact ³ n and level of volatilidad.& #13; Since now we have an equal base of volatileness, we can calculate propagacià ³ n of fertile valley taking the difference between opcià ³ n from two fertile valleys individual. In the previous example, propagacià ³ n fertile valley is. 03 (. 08 -. 05). The fertile valley of propagacià ³ n calculates finding the difference between those of the fertile valley of the two individual options, because in the time of propagacià ³ n, that pasarÃlong time one opcià ³ n and cuts the other opcià ³ n.& #13; As volatileness moves a garrapata, you ganarÃthe value of fertile valley one of the options at the same time of losing the value fertile valley of the other. Therefore propagacià ³ n of fertile valley must be equal to the difference between the fertile valley of two options. Therefore, ours expansià ³ n is a value of $ 1. 20 to 36 with a volatileness. 03 fertile valley or $ 1. 32 to 40 with a volatileness. 03 vega.& #13; Returning to our value difusià original ³ n of $ 1. 00 with a fertile valley from. 03, now we can calculate the volatileness of which propagan.& #13; We know the difference is a value of $ 1. 20 to 36 of volatileness with a fertile valley of. 03. Therefore, we can suppose that the commerce of difusià ³ n from $ 1. 00 deberÃto develop a commercial activity in a volatileness smaller than 36.& #13; In order to know cuÃnto mÃs under is in the first place to take care of the difference both enters values extended and that is of $. 20 ($ 1. 20 to 36 volatileness less $ 1. 00 a? Volatileness). Soon we divided $. 20 by fertile valley propagacià ³ n of. 03 and we obtain 6. 667 garrapatas volatileness. To continuacià ³ n, to reduce 6. 667 garrapatas volatileness of the volatileness of 36 and we have 29. 33 of volatileness for the commerce of difusià ³ n from $ 1. 00.& #13; También can determine the volatileness of propagacià ³ n like changes of prices of propagacià ³ n. We are going to fix the price of difusià ³ n from $ 1. 30. In order to calculate this, first we must have the value of propagacià ³ n ($ 1. 20 to 36 volatileness) and of finding the difference in dà ³ lares between éste and the new price of propagacià ³ n ($ 1. 30). The difference is of $. 10. This difference in dà ³ lares now is divided by the fertile valley of the differential. $. 10 divided by the difference. 03 fertile valley gives to a value of 3. 33 garrapatas volatileness him. Soon one adds the 3. 33 garrapatas to the volatileness of 36 and propagacià is obtained 39. 33 like the volatileness of the interchanges ³ n from $ 1. 30.& #13; Double-Go to verify our work by means of cÃlculo of the volatileness of the other manera.& #13; This time we are going to do cÃlculo moving the August 70 calls to the volatileness of the base of the June equality 70 calls. Según the calculated thing previously, the August 70 calls tendrÃa value of $ 3. 32 to 40 volatilidad.& #13; The June 70 two calls are worth dà ³ lares. 00 to 40 volatileness. AsÃ, the difference is a value of $ 1. 32 to 40 volatilidad.& #13; Now we are going to move the new price extendià ³ to $ 1. 30, $. 02 mÃlow s that the value of propagacià ³ n to 40 volatileness. Like before, we took the difference in the prices from propagacià ³ n. The result is $. 02 ($ 1. 32 – $ 1. 30). Then, it divides $. 02 by fertile valley ours expansià ³ n of. 03 (it remembers that the fertile valley of propagacià ³ n is equal to the difference between the fertile valley of the two individual options). $. 02 divided by. 03 give a value us of. 67. That. 67 the volatileness of our base of 40 is due to remain. That gives 39 us. 33 (40 -. 67) the volatileness of the interchanges propagacià ³ n from $ 1. 30. This volatileness responds ours cÃlculo previous to perfeccià ³ n.& #13; Perhaps at first sight, it is asked for qué we went to través of all these cÃlculos. With the June 70 calls to 40 volatileness, the two price of dà ³ lares. 00, fertile valley. 05 and 70 of August to the 36 calls of volatileness, the three price of dà ³ lares. 00, fertile valley. 08 Âby qué not to have an average of volatileness? This us darÃa a volatileness 38 for difusià ³ n with a price of $ 1. 00 when in fact $ 1. 00 in extensià ³ n represent 29. 33 volatilidad.& #13; This serÃa almost nine by garrapatas ones difference that represents a friolera error of 30%! Because, as it were said previously, Fertile valley is not linear, every month of way cannot be weighed uniforms and finishes both taking an average from months. By the love of argument to suppose it did that it. We say that you find the difference of fertile valleys of the options and came above for with one propagacià ³ n of the fertile valley. 03 that is the correct one. Nevertheless, when ³ n tries to calculate the volatileness of propagacià and the price that tendrÃan dificultades.& #13; Now, ³ n with the price of cotizacià returns to calculate propagacià ³ n of $ 1. 30, or $. 30 mÃhigh s that its value in 38 volatileness. It divides that $. 30 fertile valley differentiates superior in difusià ³ n from. 03. You obtain an increase of 10 by garrapatas volatileness. Añade that increases to base 38 volatileness. That means that you feel propagacià ³ n negotiates to 48 volatileness instead of 39. 33 volatileness! This type of error podrÃa to be very, very expensive. It remembers, apples with apples, oranges with oranges. It does not matter that volatileness opcià ³ n of propagacià ³ n to move the time as both options for a volatileness of the equality base.

Rum Ianieri is at the moment head strategist of options in the University of options, one compañ

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