Actual Volatility of an Option

Discussion in 'Options' started by rrisch, Apr 23, 2004.

  1. rrisch


    Are their any studies of the relationship (if any) of the historical volatility of an option (considered as an asset itself; I am not talking about the volatility of the underlying) and its implied volatility?
  2. lyfegrd


    It would be wonderful to find such a tool, however with the short life span of options, and all of the various expirations and strikes I think it would be hard to find such a tool. Keep in mind though that historic volatility is simply a standard deviation calculation, so if you wanted to you could track the prices of a particular option and calculate the standard deviation on Excel. You could then compare your finding against the current implied volatility, which traditionaly is how volatile the maket makers feel the options would be until expiration.
  3. rrisch


    I wasn't talking about a tool. I think all the data you need to do it is available from sources like or I am looking for an intuitive meaning for IV. I think the "traditional" meaning for it, you mention, is a stretch. Characterizing it as what you get by back solving Black-Scholes, after plugging in the current option price, doesn't help either. The data showing that you get good trading results by using relative IV, for a particular option's chain, as a proxy for relative valuation, also is pretty meager.
  4. damir00

    damir00 Guest

    the actual volatility of any asset is just it's trading range normalized to price. not exactly sure why you want to compare that to the IV of something else, but it's easy enough to do. others have pointed out where to get historical IV data, so all you need is to suck that into excel along with price data, calculate the running trading volatility, and make a chart of both squiggles.

    have to admit i'm at a loss why you want to do this - IV relates to the underlying, not to the option - but hey, i'm always interested in hearing something new. :)
  5. rrisch


    :confused: IV doesn't relate to the option??????????? Now I have heard something really new. :D
  6. rrisch -

    A couple thoughts:

    1. When you say "historical volatility of the option" are you really interested in range of implied volatility the option has had? Since the option is a derivative of the underlying security, HV of the option prices seems somewhat meaningless since their price is based on the underlyings. On the other hand, looking at the IV range the option has taken relative the underlying is useful - you might be able to get that from

    2. Keep in mind that when you're looking at historical price data for options, it's not a simple and clean task. For it to be meaningful, you have to know the price of the underlying at the time the price of the option that you're looking at was snapshot.

    You also can't depend on closing prices because the closing price quoted for an option is just the last trade price. If the last trade occurred 1/2 hour before market close and the underlying's price moved considerably in the last 1/2 hour - then the option's "close" price has no meaningful relationship to the underlying's "close" price. And if you're looking at a fairly thinly traded contract, the "close" you're looking at for the option might actually be from a trade yesterday and completely meaningless.

    For a rational comparison, you'd need the historical last bid/ask for the contract for the day to use as a reference against the underlying's closing price. But even then you could still get skews because some contracts may go to bid:0 ask:999 at the close as placeholders.
  7. damir00

    damir00 Guest

    not sure what's troubling you. IV is part of the option price, but the volatility it (theoretically) represents isn't that of the option itself, it's of the underlying. an option on the option would have IV representing the volatility of the, um, first option.

    too many options, lol.
  8. ============

    Robert R;

    Pondered your question;
    might want to study, record in notebook , ponder paragraph # 2 in Archangel reply .

    I solve the non liquid contract problem by not looking/trading them.:cool:
  9. PAL5700



    actually what you said is true that if the stock has a big move at the end of day and the option hasnt traded, its closing price is not in line.
    while that is correct, now all options are marked either last trade or if its out of range its marked on the current bid or offer.
  10. I believe each one of these posts neglected to find out the terms of the volatility sought.
    Because there are so many options traded for any given asset, the investor should first determine his criteria, including range and time, around an asset. Then the investor should classify this criteria as an asset itself.

    I might be wrong, but I belive "misch" desires to have an understanding of the probability options possess for increasing or decreasing in value regardless of the underlying asset.

    If we define a set of terms regarding options, as an asset itself, we can study those terms and determine the percentage of ones that increased or decreased in value, and the percentage range those prices moved.

    For example:
    Say we set the terms of an option class as:
    10% on either side of the underlying
    3 months to expiration

    Now we can apply that set of terms against any historical set of prices, and determine the volatility of the option class, as an asset itself.
    #10     May 1, 2004