CHAPTER 14
Studying Volatility Charts
Implied and realized volatility are both important to option traders. But
equally important is to understand how the two interact. This relationship is
best studied by means of a volatility chart. Volatility charts are invaluable
tools for volatility traders (and all option traders for that matter) in many
ways.
First, volatility charts show where implied volatility (IV) is now
compared with where it’s been in the past. This helps a trader gauge
whether IV is relatively high or relatively low. Vol charts do the same for
realized volatility. The realized volatility line on the chart answers three
questions:
Have the past 30 days been more or less volatile for the stock than
usual?
What is a typical range for the stock’s volatility?
How much volatility did the underlying historically experience in the
past around specific recurring events?
When IV lines and realized volatility lines are plotted on the same chart,
the divergences and convergences of the two spell out the whole volatility
story for those who know how to read it.