|
PureBytes Links
Trading Reference Links
|
Some clarifying notes about Historical and Implied volatility:
1. Historical volatility is the annualized standard deviation of daily returns. Market
return distributions are not Gaussian (they have "fat" tails) and this fact is correctly
reflected in historical volatility. Many option traders place a little importance on the
value of the historical volatility and I definitively will not use it as a proxy for
implied volatility.
2. Implied volatility in TS 8.1 (IVolatility built-in function) returns the daily average
weighted Implied Volatility of the options for an underlying stock, index, or future. In
general, implied volatility is the cost of completing hedging by the option traders. It is
one component of the option price that is reflects the consensus of the market place about
the volatility of price in the "future" (not in the past). This is a reason why historical
and implied volatility might differ.
3. Implied volatility is pretty much constant across expiration. However, this volatility
is not uniform across strike prices. For example, the volatility is higher in
out-of-the-money options than it is in at-the-money options. In Easy Language code, the
adjustment is done with help of "volatility skewing" distribution curve. There are many
structural reasons for the skew, see the most recent issue of SFO Magazine. For example, a
"crash premium" appeared in October 1987, narrowed after September 2001, and the crash
premium had left the market recently.
4. Why is implied volatility so important for me? Having implied volatility available from
TS 8.1, I can accurately compute synthetic options prices, and greatly simplify the
backtesting of my option strategies: selling the deep-out-of-the-money options for about
30% annualized gains and with zero drawdowns.
DC
----- Original Message -----
From: Alex Matulich To: omega-list@xxxxxxxxxx
Sent: Monday, July 03, 2006 3:09 PM
Subject: Re: Implied Volatility for Futures Contracts
DC:
>Problem is that Implied Volatility (IVolatility, see bellow) is
>not working for Futures contracts. It works only for stocks. So I
>cannot compute the synthetic prices of Call and Put options and
>backtest my option selling strategies.
>
>Question: Do you know why it is not working and when it will be fixed?
First: You should direct this question to Tradestation Securities,
not the Omega list.
Second: I may be wrong, but I think Implied Volatility has to be
part of the data feed for IVolatility to work, and it isn't part of
the data feed for futures. You'd have to calculate it yourself, but
there is no direct solution to do it. You need a numerical method
as well as the option price data.
Third: Implied volatility depends on strike price. It would be
constant with respect to strike if market return distributions were
gaussian, but they're not. Therefore it doesn't make much sense to
have it in a data feed. Frankly I'm surprised it's even available;
it's a meaningless number if you don't know the strike price to
which it corresponds.
You could use historical volatility (standard deviation of monthly
returns) as a surrogate for implied volatility.
--
,|___ Alex Matulich -- alex@xxxxxxxxxxxxxx
|