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Tuesday, June 29, 2010

Options Relative Volatility Simulation

- I have made adjustments to my TEMA Chart & Indicators. Most notably, I substituted volatility #2 indicator with my "Estimated Future Volatility" indicator. The EFV indicator can be utilized for many purposes. Mainly, 1) the trend of the EFV indicator signifies whether volatility in the underlying is increasing or decreasing, 2) EFV can be compared to the implied volatility of the options on the underlying, and perhaps could be used to determine which are undervalued/overvalued.

- The latter is a work-in-progress. I have begun a simulation choosing 10 stocks out of the top 40, whose options implied volatility are below the EFV value, and 10 stocks out of bottom 40, whose options implied volatility are above EFV value.
- I have disregarded certain drug stocks or stocks with big upcoming events and tried to diversify the list of stocks among differing sectors. I also plan to add/remove these stocks as their EFV value and Implied Volatility Values change. I do not know how this simulation is going to turn out, but I will share it with you on a weekly basis. My hope is that EFV indicator could be useful when utilized as a tool within a Relative Value Arbitrage portfolio.

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