Historical Volatility: The Gap Factor
If you missed last weeks Volatility Quiz, you can check it out here.
Similar to question number two, quiz question three also tested your ability to read a volatility chart to ascertain the relative value of option prices. Roughly 90% of you answered correctly stating that options seemed under priced. Take another gander at the question and corresponding volatility chart:
[Source: Livevol Pro]
HV20 has recently surged up to 70%, while IV30 has fallen to about 35%. If you were of the opinion that the stock was going to continue to exhibit 70% volatility, then options are a steal at 35%. We may consider initiating a long volatility strategy via a straddle or calendar spread. In addition to being "cheap" compared to HV, implied volatility also seems cheap relative to itself as it's sitting at its lowest levels in the last 6 months.
One notable issue with using historical volatility in an effort to forecast future volatility is the fact that HV can be artificially skewed by large gaps in the stock price.
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