Time frame to calculate volatility?

[hissho]

Hi Wayne and other option gurus:

i realize how important volatility is. but when trying to calculate SV and IV using Hoadley, i'm often puzzled as what time frame i should choose...one month? one year? 3 years? i've tried different time frames and the results were VERY DIFFERENT.

any help would be appreciated
hissho

 

[wayneL]

Hi Wayne and other option gurus:

i realize how important volatility is. but when trying to calculate SV and IV using Hoadley, i'm often puzzled as what time frame i should choose...one month? one year? 3 years? i've tried different time frames and the results were VERY DIFFERENT.

any help would be appreciated
hissho

Yes exactly. One thing to remember is that statistical volatility measures PAST data.

In this way it can be considered somewhat like a moving average. A 10 day MA will have a completely different value to a 20 day MA and a 200 day MA could be WAY different.

Likewise with statistical volatility. 10 day SV is going to whip around all over the shop as the market breaks out and then consolidates. Each longer measure of SV, because it is taking more data into account will whip around a lot less. It is accounting for both volatile AND quiet periods within the defined look back period. It must be remembered SV is LAGGING

Which to use? It's your choice and depends on your time horizon. If you trade with a one month horizon, then a 20 day SV (the number of trading days in a month) is probably most appropriate. If you trade with a six month view then a longer period SV could help.

SV is just ac tool used to appraise current implied volatility levels... and to make your own volatility projections. Do you think the stock will become more volatile, less volatile, the same? Observation of SV could help you determine this.

Cheers

 

[hissho]

Thanks Wayne for that.

btw you can use Hoadley's "historical volatility calculator" to "forecast" future volatility. do i need to compare IV with that future volatility? or is it just fine to compare IV with SV? when would you use future volatility?

oh nearly forgot: is there a way to put both SV and IV curves in one graph using Hoadley? otherwsie i have to look at 2 volatility calculators and it's a bit inconvenient and cumbersome...

thanks again
hissho

 

[wayneL]

Thanks Wayne for that.

btw you can use Hoadley's "historical volatility calculator" to "forecast" future volatility. do i need to compare IV with that future volatility? or is it just fine to compare IV with SV? when would you use future volatility?

If you trust the hoadley volatility forecast, you can do that. I prefer to make my own forecasts based on my own observation. Either way, it's looking into the future, you may be right, you may be wrong, but it can certainly put you ahead of the curve. For instance, if vols are very low, there is really only one place for them to go with any probability, and thats up.

Where we have to be careful is when vols are high, like right now on index options, and there is some genuine fear pervading the market. Vols can still skyrocket from here, or they could collapse. Price is very volatile. Now is a time to be very cautious.

oh nearly forgot: is there a way to put both SV and IV curves in one graph using Hoadley? otherwsie i have to look at 2 volatility calculators and it's a bit inconvenient and cumbersome...

thanks again
hissho

Not in Hoadley. I really like plotting both together thats why I like using Amibroker for volatility plots.

Cheers