Root time in term structure

Discussion in 'Options' started by TheBigShort, May 22, 2018.

  1. TheBigShort

    TheBigShort

    When they say vol moves in root time. If one month AAPL vol is 17% what should the 2 month vol be? What is the calculation for this? Thanks in advance
     
  2. pushpop

    pushpop



    • I'm assuming it is the square root of 17, which is about 4.12%.
    • That seems right. A 1 month period would definitely be more volatile than a 2 month period.
     
  3. TheBigShort

    TheBigShort

    Thanks, I have read this article but still can not figure out the math. If we use AAPL as an example (because it is liquid so should be correctly priced). One month vol is 18%. 2 month vol is 18.8%

    .18*sqrt(2) = .25.... how are they getting 18.8%?
     
  4. sle

    sle

    What "they" say actually means if 1 month vol moves X, 2 month will move X / sqrt(2) etc.
     
    cdcaveman likes this.
  5. TheBigShort

    TheBigShort

    .18/sqrt(2) = .12. Still not 18.8%
     
  6. sle

    sle

    Dude, it's the CHANGE in vol, that behaves in a root-time manner. E.g. 1 month changes by 1 vol, 2 month will change by 1 vol / sqrt(2).
     
    cdcaveman likes this.
  7. I'm just curious, is the OP trying to create an indicator or study ?
     
  8. sle

    sle

    I would imagine OP is trying to understand the term structure of vol. A noble task, truly.
     
  9. TheBigShort

    TheBigShort

    Indeed. Trying to find some flaws in the less liquid underlyings term structures. Have you come across any flaws in term structures?
     
    #10     May 23, 2018