Calculating Volatility Data
Accurate data are essential for calculating volatility. Many of the volatility
data that are readily available are useful, but unfortunately, some are not.
HV is a value that is easily calculated from publicly accessible past closing
prices of a stock. It’s rather straightforward. Traders can access HV from
many sources. Retail traders often have access to HV from their brokerage
firm. Trading firms or clearinghouses often provide professional traders
with HV data. There are some excellent online resources for HV as well.
HV is a calculation with little subjectivity—the numbers add up how they
add up. IV, however, can be a bit more ambiguous. It can be calculated
different ways to achieve different desired outcomes; it is user-centric. Most
of the time, traders consider the theoretical value to be between the bid and
the ask prices. On occasion, however, a trader will calculate IV for the bid,
the ask, the last trade price, or, sometimes, another value altogether. There
may be a valid reason for any of these different methods for calculating IV.
For example, if a trader is long volatility and aspires to reduce his position,
calculating the IV for the bid shows him what IV level can be sold to
liquidate his position.
Firms, online data providers, and most options-friendly brokers offer IV
data. Past IV data is usually displayed graphically in what is known as a
volatility chart or vol chart. Current IV is often displayed along with other
data right in the option chain. One note of caution: when the current IV is
displayed, however, it should always be scrutinized carefully. Was the bid
used in calculating this figure? What about the ask? How long ago was this
calculation made? There are many questions that determine the accuracy of
a current IV, and rarely are there any answers to support the number.
Traders should trust only IV data they knowingly generated themselves
using a pricing model.