Posted by forex at 7:47 AM
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1. Type in the stock of interest into a stock option software package and calculate both historical and implied volatility levels
2. Evaluate both volatilities and determine if their values are relatively high or low based on past performance. This will be given by a percentage level.
3. Calculate which of the two volatility types is greater than the other.
4. Review the data and determine if implied volatility is greater than historical volatility. If implied volatility is greater and if either volatility level is high relative to its past performance, then a selling strategy should be selected.
5. Review the data and determine if implied volatility is lower than historical volatility. If implied volatility is lower and if either volatility is low relative to its past performance, then a buying strategy should be selected.
6. Take no action if any other configuration of the volatilities is observed. This is considered to be a mixed signal.