historic volatility

[fundjunkie]

All,
When weighing implied volatility against historic volatility is there a "standard" lookback over which historic volatility should be calculated? And should this lookback period vary in accordance with the expiry date of the option being considered?

Clearly, results of analysis can vary significantly depending on the way historic volatility is calculated.


Thx,
D

 

[apples10]

All,
When weighing implied volatility against historic volatility is there a "standard" lookback over which historic volatility should be calculated? And should this lookback period vary in accordance with the expiry date of the option being considered?

Clearly, results of analysis can vary significantly depending on the way historic volatility is calculated.


Thx,
D

You should compare comparable periods. Thus for instance if you are presently looking at a March expiry Option you should compare the implied volatility to the 3-month realised (historic) volatility.

This is especially important for variance swap trading where the variance price is made off the implied but settles into the respective realised.

As a whole for the last 18-months implieds have been above realised, although just recently they have reverted close to parity. This 'mean reversion' is a theoretical phenonemon that some traders try to exploit, just hasn't worked recently!

 

[Profitaker]

When weighing implied volatility against historic volatility is there a "standard" lookback over which historic volatility should be calculated? And should this lookback period vary in accordance with the expiry date of the option being considered?

Personally I monitor 5 day, 20 day and annual HV. I monitor IV on a daily basis.

I guess your question could be re-written "How to predict future Vol ?".

Well, whoever solves that one will become very rich indeed.

As a whole for the last 18-months implieds have been above realised

Any particular market ?

This 'mean reversion' is a theoretical phenonemon that some traders try to exploit, just hasn't worked recently!

Another word for theoretical phenonemon as in "reversion to the mean" is..... gamblers fallacy.

But I much prefer the phrase theoretical phenonemon.

 

[Silent.Trader]

When weighing implied volatility against historic volatility is there a "standard" lookback over which historic volatility should be calculated? And should this lookback period vary in accordance with the expiry date of the option being considered?

Clearly, results of analysis can vary significantly depending on the way historic volatility is calculated.

It's completely up to you what you compare. I don't think there's any definite answer on this. First should be defined why you would compare HV's with IV's. IMHO there's no real use to compare them as they are two completely different things. HV does not predict future volatility and as such is of no use to decide on a correct IV.

HV's may be handy to estimate likely outcomes for future volatility, but that's about it. Future volatilities may be significantly different from historical volatilities. Only one press release with high impact news may alter historical patterns significantly. A takeover bid may result in virtually no volatility after an initial pricejump, speculation about fraud or a take over bid may surge volatilty to astronomical levels, to name some simple examples.

grtnx
Wilco