# Statistical Volatility - A New Model Required



## wayneL (15 March 2006)

Most of what I learned about trading options was learned trading on the US exchanges. Not very many weeks ago, I decided to migrate my account back to the Australian Stock Exchange. The reasons for this were exclusively lifestyle based; I didn't want to work Friday nights anymore because I was missing too many good piss-ups. If I was going to be asleep half of Saturday, it is going to be for recovery, rather than because of nocturnal money making habits.

Anyway that's beside the point.

In the United states the standard measure of statistical volatility (SV) is a simple 20 or 30 day, annualised percentage volatility equation. This is expressed in Amibroker or Metastock formula lanuage like this:

(StDev(log(C/Ref(C,-1)),20) * sqrt(252))*100

You could plot this on a graph, along with the implied volatility (IV), and see very plainly that IV tended to reflect the 20-30 SV. I have underlined "tended to reflect", because SV and IV will never always match each other. SV is measured over past data, whereas IV is an estimate of future volatility. Both SV and IV oscillate in a quite broad range in those markets.

However upon applying my templates to the Aussie market, something was wrong, something was different. IV tended to stay in a much tighter range compared to the US. But the standard 20 day SV charted a much more extreme course than IV. IV was not reflecting this measure of SV at all.

It was clear to me that the Australian market makers were using a different measure, a much more sedate measure than the Americans. Simply lengthening the look-back period of the standard SV equation wasn't doing it, much to lagging and innacurate when current volatilities were changing. I played with exponential moving averages of SV, but that didn't really work either. Then I had this idea; how about an exponentially weighted SV equation? My idea was a longer term SV measure but weighted with the most recent SV, much like an exponential moving average.

This seemed to work! After playing with different parameters, I got an SV measure that IV seemed to be reflecting.

So herewith I tender my Exponential Statistical Volatility (In Amibroker AFL):

long = (StDev(log(C/Ref(C,-1)),100) * sqrt(252))*100;short = (StDev(log(C/Ref(C,-1)),10) * sqrt(252))*100;
x1 = short - Ref(long,-1);
x2 = (x1* (2 / (10+1) ) ) + Ref(long,-1);
Graph0 = x2:







As you can see the IV tends to reflect this particular measure of IV and my reasoning is that the Aussie MM's must be using something similar. I think this is important because one of the best ways of trading options, is by making volatility forecasts based on SV/IV history. So we need to be playing in the same ballpark as the MM's. There will be no perfect measure of SV because of what SV is; merely a statistic based on past information. But I think this is actually a better way of looking at SV anyway.

Thoughts?


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## sails (15 March 2006)

Wayne that is interesting - never thought that our MM's might be using a different formula     I just had another look at your original OSH SV/IV charts where IV was lower than SV, but looking at your new chart at approx the same period of time, IV was actually a bit higher than SV.   IV has continued to fall a little since that time, so I expect the paper trade is not doing too well atm, however, based on the newer charts you would not have taken the trade.

Looking seriously at getting Amibroker (did take the trial some time ago) - just a bit daunted at learning the programming language as well as learning the software.  Perhaps you could post a BHP chart with your new formula and see how it compares with the one you posted for me a few days ago?


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## wayneL (15 March 2006)

Margaret,

With the OSH trade, one could still reasonably expect an increase in both IV and SV, based on the cycles evident in the chart. We shall see however.

BHP with new formula\/:


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## sails (16 March 2006)

Thanks for posting the chart, Wayne  - your new formula is certainly a lot more realistic and vastly different to the first chart - well done to work it out!


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## denl (17 March 2006)

Hi,
Could someone convert the Exponential Statistical Volatility into metastock code please?
Denis



			
				wayneL said:
			
		

> Most of what I learned about trading options was learned trading on the US exchanges. Not very many weeks ago, I decided to migrate my account back to the Australian Stock Exchange. The reasons for this were exclusively lifestyle based; I didn't want to work Friday nights anymore because I was missing too many good piss-ups. If I was going to be asleep half of Saturday, it is going to be for recovery, rather than because of nocturnal money making habits.
> 
> Anyway that's beside the point.
> 
> ...


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## wayneL (17 March 2006)

Too easy  


```
long:= (StDev(log(C/Ref(C,-1)),100) * sqrt(252))*100;
short:= (StDev(log(C/Ref(C,-1)),10) * sqrt(252))*100;
x1:= short - Ref(long,-1);
x2:= (x1* (2 / (10+1) ) ) + Ref(long,-1);
x2
```

Cheers


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## LOVE_OPTION (17 March 2006)

hi, 
could u tell me what program u guys are using to get IV?
could i get IV through either etrade or commsec?

thanks.


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## sails (18 March 2006)

wayneL said:
			
		

> So herewith I tender my Exponential Statistical Volatility (In Amibroker AFL):
> 
> long = (StDev(log(C/Ref(C,-1)),100) * sqrt(252))*100;short = (StDev(log(C/Ref(C,-1)),10) * sqrt(252))*100;
> x1 = short - Ref(long,-1);
> ...




Hi Wayne,

Having another try at Amibroker over the weekend as I would really like to look more closely at the Aussie IV/SV charts.  However, when I paste your code into the formula editor, it says "syntax error 30" when I click on the verify syntax button.  

I'm going through the tutorials now hoping that the mud will clear, but wondered it you can help point me in the right direction?  Usually pick up software fairly quickly, but this one is proving more difficult!

Cheers,
Margaret.


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## wayneL (18 March 2006)

sails said:
			
		

> Hi Wayne,
> 
> Having another try at Amibroker over the weekend as I would really like to look more closely at the Aussie IV/SV charts.  However, when I paste your code into the formula editor, it says "syntax error 30" when I click on the verify syntax button.
> 
> ...




Margaret,

I have written some info here

Getting IV into AB

Good luck


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## wayneL (18 March 2006)

LOVE_OPTION said:
			
		

> hi,
> could u tell me what program u guys are using to get IV?
> could i get IV through either etrade or commsec?
> 
> thanks.




LO

I am subscribing to the data via www.premiumdata.net it is contained in the "indicators" Add-on. It costs an few extra buckks a month.

Cheers


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## chemist (1 May 2006)

wayneL said:
			
		

> Margaret,
> 
> With the OSH trade, one could still reasonably expect an increase in both IV and SV, based on the cycles evident in the chart. We shall see however.




Why don't you buy volatility when the red line is well above the black one and sell it to when it's the other way around?   

cheers,
Chemist


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## wayneL (1 May 2006)

chemist said:
			
		

> Why don't you buy volatility when the red line is well above the black one and sell it to when it's the other way around?
> 
> cheers,
> Chemist




Because buying and selling volatility ain't that straight forward hombre'.


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## chemist (10 May 2006)

wayneL said:
			
		

> Because buying and selling volatility ain't that straight forward hombre'.




Long and short ATM spreads?

chemist


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