By: Mr. Diego Rebissoni (creator of www.leiod.com.ar)
In an effort to answer the question that I have made repeatedly in recent weeks about the turmoil in the American market, this article will try to provide tools to understand if the NYSE derivatives traders discounted over a period of turbulence or stability for the foreseeable future.
Who has not done any of the following questions after black October,
-may be repeated a similar crisis in the short term? "You step
worst of the crisis or there may be a second round?
"The prices will stabilize or continue to suffer significant variations?
A first concept which we must stop the volatility, this term is a proxy measure of changes in asset price and therefore the associated risk. Taking the example of Citigroup Inc. (Symbol C), and simplified way, if you have had percentage changes in the last 4 days of +5%, -4%, +10% -6%, Citi has been much more volatile or riskier other action against its variations have been, +1%, -2% +2% -3%. It is clear that this measure quantifies the changes, whether positive or negative and will not stop in its calculation methodology, but in concept.
Below the evolution of volatility for two assets that have focused a large volume of transactions in recent months and we will see clearly how these values \u200b\u200bare triggered by the crisis and still maintain high values. Examples include Citigroup Inc. (Symbol C) and a fund or ETF negotiable, representative of a barrel of oil (United States Oil Fund LP Symbol: USO)
be clearly seen in both graphs that the volatility reaches its maximum in the period from October to December 2008 and triple them, at least, the values \u200b\u200bof 2007. The big question is how to continue this story? While those who write this story will be the market and only with the passing of days know as it continues, we will use a technique widely spread in the options market to assess a possible trend.
Our technique is based on the Black & Scholes, who won the 1997 Nobel prize in economics for developing a formula for valuing financial options. The financial options for those who have not heard of them, are a right to buy / sell stock at a certain price until a certain point, but to acquire this right must pay a premium. Both economists developed a formula to determine a fair value of the premium and some of the key factors for determining the volatility of the stock.
For our use the implied volatility estimate for the next maturity of financial options, it is inferred that volatility complies with Black & Scholes formula to price premiums in the market operated on December 26, 2008. The following shows the results of evaluations.
The USO ETF graph shows values \u200b\u200babove average volatility of the crisis in the short term but slightly lower for longer durations. In the case of Citibank, the results are very different, the implied volatility of Black & Scholes is well below average values \u200b\u200bon Oct-Nov-Dec ('as if the derivatives market believe that volatility will fall heavily or do not agree with such volatility to value so high. ") A striking fact is that in both cases the volatility in the long run are located in similar values \u200b\u200b(70% -80%), representing approximately 3 times the value for 2007.
In short, the derivatives market or evaluating financial options for the long term, as the art of Black & Scholes, that volatility will remain very high compared to 2007 but below the averages at the time of panic the global market.
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