Page 5 - Calculating Historical Volatility flip_Float

For bin size, I typically start with .1% or .25%

Calculate the range of the 20 day volatility “most of the time”. This answer depends on your strategy
and risk management so I will leave that variable up to you to play with but something greater than
75% – 80% of the time.

To calculate the average:
Throw out observations which occurred less than 4 times and calculate the AVERAGE from the rest
of the data series.
RESULT: You know your asset in the broadest sense.

There are plenty of sites that sell historical volatility data
Words of Caution: Know how the data provider is calculating their result and how they handle such
things as rollovers (for continuous front month futures) and stock splits.
If what you REALLY want to know is the probable range of prices at expiration, use a RANGE
CALCULATOR like the one available on this site. Range Calculators are quite useful and easy to
use. If you’re looking for the probability associated with a specific date and a specific volatility, a
range calculator may be all you need.

Other Types of Volatility
There are several other TYPES of volatility used in the market. You will find blogs on this site and
others. The Types of Volatility you want to know are:
Historical Volatility: Range Volatility; Overnight Volatility;

Implied Volatility: The Markets expectation of volatility of the underlying asset to expiration day.
There are several Implied Volatility Figures we work with to make what is called The Volatility
Surface

Forecast Volatility: Your forecast of the volatility of the underlying asset over some future time
period.

Actualized Volatility: Based on trades made in your portfolio

Event Volatility: Calculated for both historical and implied volatility around earnings dates,
economic release dates and other market impacting events.

Volatility Studies
There are a handful of studies I like to use. From those studies I can determine the risk/reward of an
options strategy. The way each study is used will differ depending on my goals. A volatility will use
the studies to determine whether to trade gamma or skew. For my personal account my strategies
portfolio based: selling calls versus stock, trading for earnings, etc.

Feel free to use On Tap Knowledge in the sidebar to ask questions and receive timely answers to
your option questions.