Jeff Augen's StdDev Price Change

[dbh21]

I've recently read Augen's book where he describes this indicator. Another book (Benklifa's on Iron Condors) expresses admiration for this indicator.

But I am not really sure how i can use it to any advantage. It shows me the volatility of historical price changes, but how can I take advantage for this in opening or exiting a trade?


These guys had some nice graphics for the indicator
http://www.thinkscripter.com/indicator/standard-deviation-price-change/

Thanks

 

[cdcaveman]

Quote from dbh21:

I've recently read Augen's book where he describes this indicator. Another book (Benklifa's on Iron Condors) expresses admiration for this indicator.

But I am not really sure how i can use it to any advantage. It shows me the volatility of historical price changes, but how can I take advantage for this in opening or exiting a trade?


These guys had some nice graphics for the indicator
http://www.thinkscripter.com/indicator/standard-deviation-price-change/

Thanks

Augen smogen.. Read his books... Thats was done by the great mathmatician mandelbrot way before this jeff guy....options are underpriced relative to large devation price changes and overpriced on the mean changes.... So.... Your trying to sell options when they are over priced and buy when underpriced....price spikes in std devs should give you some possible insight into volatility.... This indicator is better used in explanantions of why stock price distributions arent log normal.... Condors are net premium sale..short vol... as well as butterflys... strangles straddles and wrangles are net long vol... younshould have more then one reference to vol when putting on condors... one condor blow out you could spend the rest of the year trying to make up for... bollinger bands.. Charting relized against implied vol... etc etc...

 

[eh_geee@gmail]

Quote from dbh21:

I've recently read Augen's book where he describes this indicator. Another book (Benklifa's on Iron Condors) expresses admiration for this indicator.

But I am not really sure how i can use it to any advantage. It shows me the volatility of historical price changes, but how can I take advantage for this in opening or exiting a trade?


These guys had some nice graphics for the indicator
http://www.thinkscripter.com/indicator/standard-deviation-price-change/

Thanks

I know the thinkScripter site -- why not raise the question there?

 

[dbh21]

Honestly because i thought it much more likely that people here would have read Augen's book

 

[oldnemesis]

It seems to me that the rational trade would be the same as with bollinger bands (which use the Std dev of price as opposed to the Std Dev of the log of price that Augen uses).

Short the top long the bottom.

Here's a run through using AAPL and SPY from a couple of years ago:

http://yeforex.blogspot.com/2010/02/jeffaugenmodel.html

I myself doubt it makes any real difference... I would bet that a prospective study comparing trading Bollinger Bands and 'Augen bands' would yield no difference.

I have done a number of such studies and find that mostly it doesn't pan out, and when you DO get a significant difference in the past data if doesn't hold up in future data. The market is just too labile for mathematical modeling... even using probabilities... otherwise there would be a whole gaggle of billionaire graduate students.



http://en.wikipedia.org/wiki/Long-Term_Capital_Management

 

[dbh21]

This is so far what I am find as well, at least with my current test. I am back testing different iron condor positions over time, trying to figure out how different management techniques perform. But all the different entry criteria I have tried so far yields marginal improvments if any.

 

[sle]

Quote from oldnemesis:
It seems to me that the rational trade would be the same as with bollinger bands (which use the Std dev of price as opposed to the Std Dev of the log of price that Augen uses).

You surely mean log of returns? While the standard deviation of log-returns it's not the same thing as standard deviation of price, to the first order they relate to each other multiplicatively (StdLog =~ StdPx / Px). So there is no real difference there. I think the key is if you are using daily returns/changes or using actual predicted tenor returns.

Quote from oldnemesis:
http://en.wikipedia.org/wiki/Long-Term_Capital_Management

Their problems were not any different from the Tulip crisis and had little to do with mathematical models. Excessive leverage.

 

[cdcaveman]

Quote from sle:

You surely mean log of returns? While the standard deviation of log-returns it's not the same thing as standard deviation of price, to the first order they relate to each other multiplicatively (StdLog =~ StdPx / Px). So there is no real difference there. I think the key is if you are using daily returns/changes or using actual predicted tenor returns.


Their problems were not any different from the Tulip crisis and had little to do with mathematical models. Excessive leverage.

Sle can you put in a very elementary way what tenor is

 

[sle]

tenor = length of the period, e.g. if you are trying to calculate 10 day forecast, are you going to use a distribution 10-day returns or standard deviation of 1 day returns and re-scale them by sqrt(10).

 

[cdcaveman]

Quote from sle:

tenor = length of the period, e.g. if you are trying to calculate 10 day forecast, are you going to use a distribution 10-day returns or standard deviation of 1 day returns and re-scale them by sqrt(10).

Definition of 'Tenor'
The amount of time left for the repayment of a loan or contract or the initial term length of a loan. Tenor can be expressed in years, months or days.

Read more: http://www.investopedia.com/terms/t/tenor.asp#ixzz2BbH33Yul


i kind of thought that if there was a cost of carry for a particular arb strategy.. the tenor would be a calculation of how much interest is left to pay or be paid..

"am i going to use 10 day returns or stdev of 1 day returns rescaled by the root of time.". i don't know the difference .. whats the difference.