Divide by Nought

Archive for the ‘Learning’ Category

A more rigorous way to use the SCAMPER brainstorming method

leave a comment »

If you’re not familiar with it, SCAMPER is a brainstorming method for augmenting or “creating” new ideas, methods, etc.  The basic process is briefly described here:

How to use SCAMPER on eHow.com

This method is fine on its own and can be used without modification.  However, it can be useful to go further by redeploying the same process against its results.  In other words:

  1. Go through the basic analysis.  As you’re doing so create your list of ideas.
  2. Once you’ve complete the first pass go through the list and re-apply each of the 9 principles to each item in your list.
    1. In addition to factors outside of your list, for substitution, combination, adaptation and elimination consider whether other items on your list could be applied to the current item.
  3. Make note of any new ideas that come to mind.
  4. Repeat this process as many times as desired using the newly emerging ideas.

The point is to encourage more in-depth understanding of the ideas and generate more varied output.


Written by me

Wednesday, September 15, 2010 at 1:08 pm

Ah, unapportioned-tax how I love thee.

leave a comment »

The following excerpt is from “The joy of tax” in the April 10-16th 2010 issue of The Economist:

“The federal tax code, which was 400 pages long in 1913, has swollen to about 70,000. Americans now spend 7.6 billion hours a year grappling with an incomprehensible tangle of deductions, loopholes and arcane reporting requirements. That is the equivalent to 3.8 [million] skilled workers toiling full-time, year-round, just to handle the paperwork. By this measure, the tax-compliance industry is six times larger than car making.”

Written by me

Saturday, April 10, 2010 at 11:10 am

Posted in Learning, Musings, Uncategorized

Tagged with ,

Primary, secondary…

leave a comment »

…tertiary, quaternary, quinary, senary, septenary, octonary, nonary, denary (10), duodenary (12), and vigenary (20).

I’ve done a fair amount of looking and at the time of this post the web does not seem to know what the holes are between 10 to 12 and 12 to 20; or beyond.  In fact, there are some sites that all but state that the words to fill those holes do not exist.

Written by me

Wednesday, November 26, 2008 at 11:00 am

Volatility and Options Pricing

with one comment

For experienced traders this is a little slow, but there are some interesting points further down especially in the form of other things to look into.

For less experienced traders I think it’s worth adding one bit of information concerning the nature of volatility. I don’t believe this was mentioned, although often eluded to. That is, volatility, while having lots of definitions, is, in the end, the mechanism by which market makers control the prices of options.

All other factors (underlying price levels, greeks, etc) are simply byproducts of options pricing equations. This is somewhat like the Fed controlling interest rates in an effort to control the economy. They essentially have one big lever that they can move around and everything else falls out of that. Of course, in both cases there are other factors but volatility for market makers and interests rates for the Fed are the big guns so-to-speak.

What’s the point?

A few compelling quotes from Ron Ianieri concerning volatility that really get to the point of why one should care:

“What really makes an option an option is extrinsic value.” (An option with almost no extrinsic value essentially moves directly with the stock).


“The biggest components to extrinsic value is volatility.”


“Volatility is the most important component of option pricing.”


“When volatility increases all option prices increase” and vice versa.

A look at the differences in an option from the perspectives of a buyer and a seller.

  • same stock
  • same month
  • same strike
  • same interest rate (rho)
  • same dividend paid to both parties; if paid at all.
  • different opinions on the current volatility level.
    That is, one party (buyer or seller) thinks that 30% is high while the party (the buyer to a seller, or seller to a buyer) on the other side of the trade thinks that it’s low.

The Basics

There several kinds of volatility:

  • Historic; volatility of the stock for some historic period. Actual, factual, specific value.
  • Forecast; volatility that you believe the option will be at in the future.
  • Implied; volatility that can be determined by solving option pricing model for volatility at a certain price.

These are fin definitions but it’s worth noting that there are other more elaborate definitions of these terms out there. I’m paraphrasing from the chat.

Vega shows the price movement given a one tick (volatility is measured in percentages) movement in volatility. That is if the Vega is 0.08 and volatility moves up one point (i.e. from 30% to 31%) the option price will increase 8 cents. On the flip side, if the volatility moves down one point the price will decrease 8 cents.

Volatility affects all other greeks in an options price.

Volatility Skews

The discussion of Skew starts with a statement and a question. First, when you look at the historic volatility it can only ever be a specific value for a stock at a given point, because once the move occurs the volatility up to and at that point is factually known. Given that, why does a single month’s options have different implied volatilities if the stock can only move/trade at one volatility?

Term referenced: Log normal distribution

Vertical Skew / Volatility Smile

The question above is really concerning Vertical Skew. This is also referred to as the volatility smile (term to look-up: Kurtosis). Vertical Skew is created by implied volatility that is “pumped up” further away from the money in order to make the options worth selling further away from the ATM price. That is, moving the markets far away from the at the money strikes takes larger movements in volatility because the Vega for those options is so much smaller. Thus market makers essentially create the volatility skew by adding more volatility to options further away from the at the money strike which they have to do to compensate for low volatility sensitivity (low Vega).

Horizontal Skew / Volatility Tilt

Horizontal skew is the skew across multiple months. That is, front month volatility tends to be higher than back months. This is in part due to the fact that Vega is higher in the back months and thus market makers don’t need to make large adjustments to change the price of the option the desired amount for movements in the underlying or other expectations in later months.

Put-Call Skew

Corresponding options: a put and a call that share the same month and the same strike. This are synthetics or put-call parody. Theoretically these should be trading at the same price, but they tend not to, and that is the put-call skew.

Positive put-call skew: is when the call is valued higher than the put.

Negative put-call skew: is when the put is valued higher than the call.

Originally a negative put-call skew was created because the majority of options traders were long the underlying stock. In dealing with options the stock holder was looking to protect themselves by buying options and/or create additional income by selling calls. So simply by virtue of supply and demand calls sold for less and the puts cost more to buy.

Not covered in this chat, I’ve also heard a lot of discussion concerning a negative skew in anticipation of market crashes. That isn’t as an indicator that the market will move down, but due to the expectation that markets tend to crash down and gradually work there way up.

Put-call spreads can be used to create a edge in trades.

Positive and Negative Skew

How out of the money puts are trading in relation to an equally out of the money calls. This can be used as an indicator of market makers’ expectations of the direction of the underlying.

Positive Skew: Out of the money calls trading with higher implied volatility than the related out of the money put; that is both x points out of the money. This suggests that the underlying is expected to move up. This is often seen in comodities, where it is less likely to have a surplus, and more likely to have a shortage, driving the price up.

Negative Skew: …is the opposite, and creates an expectation that an underlying is more likely to have downward movements.

Those were the major points of the chat as I saw them. There was some further discussion of synthetics, etc. Those discussions are interesting, but better taken in the context of the actual discussions.

These are my notes from the Think or Swim’s Wednesday Chat held on March 12th. The main topic of the chat was Volatility as presented by Ron Ianieri. Check out the full thing here: http://mediaserver.thinkorswim.com/transcripts/2008/20080312.html

Written by me

Friday, March 21, 2008 at 11:56 pm

Posted in Learning, Trading