Thursday, April 21, 2011

Different Paradigm for Patience in a Sideways Market

"That has always been my pet peeve - no historical data seems to be kept anywhere for options.  It's probably in the databases of larger, full service brokerages.  It could be because option pricing is based on the underlying stock price, but the time decay is a big variable. I have kept historical data for awhile, but always had to copy and paste every morning. It's too much of a pain...", explained TrashStock.

Can you actually use support / resistance methods on option history? Technical Analysis concepts on options?
All the methods used for range and trend trading?

I don't know, but a graph would be useful for visualizing historical pricing regardless...

Here's a website that does. 
Silver $SLV options graph looks like this.

I think that is why I don't feel comfortable with options. No visual or graphical representations of trading ranges are easily accessible. Let's reverse the paradigm. what if you treated equities like options. The time decay[ theta ] in stocks could be Patience decay? Let's use the same algorithm as time decay but for stocks?

I'll tell you right now, I can't do the math
Besides it's only an approximation. Wiki states, "The Black–Scholes model disagrees with reality in a number of ways, some significant. It is widely employed as a useful approximation, but proper application requires understanding its limitations – blindly following the model exposes the user to unexpected risk." You might find excel addons that would have the formula.

I changed my mind and used the time value of money, and Future Value. Well, the math is a little easier. At least you can stick that in an excel spreadsheet. My approach was to estimate the opportunity cost of holding a stock that is stuck going sideways versus what could be generated from interest in a bank or Treasury. 

Could that be used as a decision to sell a morose and depressed stock that has been going sideways for weeks?

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