39 lines
2.8 KiB
Plaintext
39 lines
2.8 KiB
Plaintext
Chapter 36: The Basics of Volatility Trading 729
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underlying over the life of the option. The computation and comparison of these two
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measures can aid immensely in predicting the forthcoming volatility of the underly
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ing instrument - a crucial matter in determining today's option prices.
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Historical volatility can be measured with a specific formula, as shown in the ·
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chapter on mathematical applications. It is merely the formula for standard deviation
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as contained in most elementary books on statistics. The important point to under
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stand is that it is an exact calculation, and there is little debate over how to compute
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historical volatility. It is not important to know what the actual measurement means.
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That is, if one says that a certain stock has a historical volatility of 20%, that by itself
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is a relatively meaningless number to anyone but an ardent statistician. However, it
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can be used for comparative purposes.
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The standard deviation is expressed as a percent. One can determine that the
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historical volatility of the broad stock market has usually been in the range of 15% to
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20%. A very volatile stock might have an historical volatility in excess of 100%. These
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numbers can be compared to each other, so that one might say that a stock with the
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latter historical volatility is five times more volatile that the "stock market." So, the
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historical volatility of one instrument can be compared with that of another instru
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ment in order to determine which one is more volatile. That in itself is a useful func
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tion of historical volatility, but its uses go much farther than that.
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Historical volatility can be measured over different time periods to give one a
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sense of how volatile the underlying has been over varying lengths of time. For exam
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ple, it is common to compute a 10-day historical volatility, as well as a 20-day, 50-day,
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and even 100-day. In each case, the results are annualized so that one can compare
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the figures directly.
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Consider the chart in Figure 36-2. It shows a stock (although it could be a
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futures contract or index, too) that was meandering in a rather tight range for quite
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some time. At the point marked "A" on the chart, it was probably at its least volatile.
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At that time, the 10-dayvolatility might have been something quite low, say 20%. The
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price movements directly preceding point A had been very small. However, prior to
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that time the stock had been more volatile, so longer-term measures of the historical
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volatility would shown higher numbers. The possible measures of historical volatility,
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then at point A, might have been something like:
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10-day historical volatility: 20%
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20-day historical volatility: 23%
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50-day historical volatility: 35%
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100-day historical volatility: 45%
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A pattern of historical volatilities of this sort describes a stock that has been
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slowing down lately. |