RIsk Ranges
- This topic has 111 replies, 20 voices, and was last updated 2 years ago by
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Sure I will do the code conversion for the benefit of PRT users. I have the link and source code, will do it next week. If I don’t please remind me, have a good Sunday! 😉
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I understand your feeling. May I suggest you to ############ . I think his message is still crystal clear about what you are searching.
Thanks also to Nicolas to dig into it.
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You can download the indicator bridge bands for ProRealTime there: Bridge Bands
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@JohnLawsCarraige,
Apologies for the delayed response. Local volatility is the volatility for a specific strike/tenor.
Trying to do an example below…
Stock ABC has only 3 options – they expire in 1 week, 2 weeks and 1 year.
1 Week expiration options –> local volatility for 1week expiry (1w Local Vol = 50%)
2 week expiration = local volatility for 2week expiry (2w Local Vol = 10%)
1 year expiration = local volatility for 1 year expiry (1Y Local Vol = 5%)
Implied Volatility for Stock ABC = 21.67% (not exact calc, but simple average)
In our above example, it appears everyone is trading the 1week expiry. Everyone is making bets that will be a LARGE move in ABC within the week. Specifically, there will be a LARGER move than would be expected by the Implied Volatility %.
The reason why local volatility is important is because the most intelligent people in markets are making markets in options. Their entire business is pricing those puppies appropriately. They have a good idea of where things are likely to go – so we should listen to the “Gohds, like Floki,” or the “machine” when they speak.
KM – do you read this? I could’ve sworn you mentioned something on an episode of the macro show in regards to a comment on here. Wouldn’t be surprised if you’re lurking!
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Some more details from a ‘defector’ that might have given away the secret sauce 😉
https://www.youtube.com/watch?v=PdoxiyTamzI
42Macro is essentially renaming them Volatility Adjusted Momentum, ‘Probable Ranges’. In the video Darius explains that the 22 day trend is given +1 point for price trend and +1 point for volatility trending opposite for long, and -1 for down trend and -1 for vola increasing. Where score is not +2 or -2 trend is neutral. Further the probable range bands are derived from ‘rescaled ranges‘. See the excellent pic below!
From this we should be able to determine how to build our ‘volatility adjusted price bands’!
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