Volatility being an Important Aspect of Trading Techniques
Contrary to popular belief, trading has been deemed relatively simpler in the present times. However, you would be required to make the most of the knowledge available regarding trading before you actually chance your arm with trading. It has been deemed of great importance that you should gain requisite knowledge on trading lest you would be running the risk of losing your money in a couple of hours of trading. It would be in your best interest that you should look for the right trading options suitable to your needs.
Why is volatility an important aspect of trading strategy?
It would not be wrong to suggest that volatility has been deemed an important aspect of any shorter-term trading strategy. Therefore, you should take your time before considering the various different ways of measuring and understanding the volatility factor. Based on the significant length of time for which you wish to hold your positions, you might look forward to having one or the other methods suitable to your specific needs. It would be pertinent to mention here that the traders have often ignored volatility skew. It held great importance in the older times when options started trading on exchange. It would be pertinent to mention here that equity market did not reveal volatility smile prior to the crashing of the market. However, it emerged after 1987.
What is volatility smile?
The volatility smile would be best described as the continuous pattern observed where ATM options had lower implied volatility. It had lower IV or implied volatility as compared to in or out of the money options. As a result, the pattern would play different characteristics for varied markets. The result would be determined by the probability of intense moves. However, in the present times, volatility smile has been skewed, as implied volatility is on the way down and OTM puts have been deemed higher as compared to ATM options. The ATM options have been known to encompass higher implied volatility as compared to OTM calls. The result is frequent market crashes.
The bottom line
The bottom line would be the method adopted by you should be responsive to considerable changes in the period you deem fit. Moreover, it should be sensitive to provide you with actionable information. It would be imperative that you should be ready to spend time trying to figure out various parameters unless you were able to find the best trade off between sensitivity and smoothness.