aphexmean

My take on market valuation volatility

AMEX:SPY   SPDR S&P 500
Stocks usually drop faster than they raise. That's why volatility increases when stocks go down. So, volatility is basically uncertainity: if you cannot easily price an asset because of a lack of information or liquidity, you probably end up with loose valuations. It's been two years now that everything seems to go up.

If you apply a moving avarage to a historical volatility chart you get a handy and predictable behavior.
If you apply a bollinger to a historical volatility chart you get a very precise band. I calculated that at two standard deviations, the HV is predictable with about 4-5% days of error.
Trying to forecast a volatility break out is almost impossible I think; I think the people contrary trading VXX             or SVXY             have seriously hurt many times these two years. Don't play difficult.

If you assume zero dividend yield and zero risk-free rate, the price of an option is then only determined by time and volatility . Time is a constant. Volatility is strongly mean reverting. This should makes it less difficult to "buy low and sell high".

Bottom line is: measure the probabilities and act upon the assumption of a normal behaviored market.
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