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-----Original Message-----
From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On
Behalf Of allistah
Sent: Friday, May 28, 2010 1:45 PM
To: OptionClub@yahoogroups.com
Subject: [TheOptionClub.com] Questions about MCatolico's Adjustment PDF
Hello all --
I've been studying Michaels PDF in the files section and I came across some
text in it (I listed the text in question at the bottom of this post) and
have a question about it. The way I read it is that if any price move in
ONE DAY happens greater than the 1.5 std.dev. that would trigger an
adjustment.
My questions are:
1) What if the stock moved consistently in the same direction, moving $1.50
per day? At what point would I make the adjustment? Still at the $2.27
(1.5 std.dev) mark?
Mc - if using the 1.5sd (or any other objective metric) the measurement
should always be from the last trade and the calculation should be modified
for the time frame. However remember this is meant more as rule of thumb
than as a deterministic ("paint by number") method. It can just as easily be
applied to 1 day as to 2 days as to 1 hour or even 1 second. Remember that
this paper was intended as very much an introduction to the kind of thinking
and mechanics behind adjustments - a primer, if you will, and not the holy
grail of trading.
2) Once you make an adjustment, do you re-calculate the std.dev. from the
current position of the underlying and again wait for those points to get
hit to make another adjustment?
Mc - yes you should recalculate since you now have a new position. and to be
even more focused, the implied volatility level should be adjusted to
reflect your new net position volatility and/or the current market IV
level.
Here is the text below that I'm referring to:
"As a start, let's assume that market noise involves any kind of price move
less than 1.5 std.dev. which would include 86.6% of expected price behavior.
Following the above example, 1.5 std.dev. equals $2.27 so we are, by fiat,
deciding that any one day price move less thatn +/- $2.27 will be ignored.
But if price somehow goes beyond this level, we are determining that the
move is significant enough to justify making an adjustment to the position."
Thank you,
-Jaime
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