What’s In The Box? From Dead Cats To Implied Volatility
4 min read
The Eye of Horus was a symbol used to protect pharaoh in the afterlife and to ward off evil. Exchange ‘afterlife’ with ‘future’, and ‘evil’ with ‘losses’, and implied volatility becomes the trader’s very own Eye of Horus.
I usually start my lectures on volatility with a glance at historic volatility. For a good reason. By assessing historic data, we can see how a certain security behaved in the past and from its performance make informed assumptions about future behaviour.
If we’re well-versed in the dark arts of quantitative analysis, we also have the opportunity to calculate certain probabilities based on that past behaviour.
What I never mention to my students – but implicitly take for granted – is the understanding that there can, unlike in politics, only be one past. A certain security moved the way it did. There’s no questioning the how, only the why. It is also true that a certain security can only follow one path into the future.
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