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Evaluating Volatility
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Evaluating Volatility

  #1 (permalink)
Trading Apprentice
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Evaluating Volatility

As a relatively newcomer to Options Trading (3 months studying Futures Options, but 2+ years studying Futures), I still have one nagging issue that is eluding me, or perhaps I have blinders on that I simply need help removing...

Regarding Statistical Volatility and Implied Volatility:
- How does one gain a handle on determining if IV for any particular commodity is high/low? I know I can compare it to previous levels, but I feel I must have a starting point (mean level of IV) to base off of. Is there an industry average of mean IV for each commodity? ...or is this something every trader just has to develop their own feel for?

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The IV Percentile (IV Rank) is what tells you if the implied volatility is high or low for the underlying. Two stocks with 90% IV are not equal. If stock A has an IV Percentile of 80% and stock B has an IV Percentile of 25%, Stock B with 90%IV is in the low end of its volatility range, and Stock A with 80% IV Percentile and 90% IV is in the high end (it has higher volatility).

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rmejia View Post
The IV Percentile (IV Rank) is what tells you if the implied volatility is high or low for the underlying. Two stocks with 90% IV are not equal. If stock A has an IV Percentile of 80% and stock B has an IV Percentile of 25%, Stock B with 90%IV is in the low end of its volatility range, and Stock A with 80% IV Percentile and 90% IV is in the high end (it has higher volatility).

Hmmm... Thinking on this one. Does this hold true with Futures evaluation?

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TNGreg View Post
Hmmm... Thinking on this one. Does this hold true with Futures evaluation?

Yes, it does, but you need to be know what dataset is being used. A continuous month (usually number 1, 2, 3 or a combo)? Percentile over a year is fine, but how's that stack up to the last 3 years, 6 years? If someone was blindly selling natural gas volatility a month or two ago because it looked expensive over the last year, they'd be hurtin' for certain right now. It's also important to know how many DTEs are included in the month(s) being reported. Some of the VIX measures for commodities drop all options <8 DTE. That's probably a decent number, and the CME has a big research dept to figure things out... For my homegrown percentile indicators, I include 10 DTE or more.

I think percentiles are a good tool, but just one of several.

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This is a big topic. You can find books that deal with only volatility, and then, of course, fill out the remainder of your bookshelf with option theory and trading strategies.

To get to the meat of your question, I'd first do some research and analysis on statistical volatility (aka realized, historical or actual; I'll call it historical). Using your chart program or free downloads from a place like BarChart or Quandl, you can get price data for individual months or a 'continuous contract.' Which is better is a separate subject and debate; since the data is free you might want to try both.

If you're going to be trading longer dated options, you should try to match IV and HV terms. For a 60 day option, that means a 40, 41 or 42 day HV (weekends excluded in HV, but not in IV). Even if you trade a 90 or 120 day option, it's eventually going to be a 30 day (or less) option, so when you're calculating HV, I'd suggest calculating and displaying varying lengths. Once you get that in chart format, you can learn a lot about what a normal HV range is for a particular market for a particular time of year. Frankly, the right HV length is like moving averages. There are some canned lengths but you can pick a number, any number. BarChart, if I recall, provides 9, 14, 20, 50 and 100 day HV in their online services. The latter covers about five months or a 150 day option.

Now, some people don't pay a lot of attention to HV, they focus on IV (again, another debate), but if you're new to this, I think it's wise to spend some time on HV first, then add IV to compare the two measures. As mentioned above, the most common number is ATM IV derived from Put and Call prices of the the nearest one or two strikes. Know what IV you're looking at and its limitations - a particular contract month, a continuous first, second or third, a blend of a couple nearby months, or a 'constant maturity' IV (30d, 60d, 90d, etc) which involves interpolation.

In previous posts I've mentioned ivolatility and Moore Research Center as places to get HV and IV data going back a year or more. Neither firm has a clean, updated website, but if you can get beyond that, the price is right. You don't need to spend $500/mo for data at this stage. Buy a month or three at Moore Research (MRCI) and even if you skip their daily options table (I wouldn't, because if you scan it you'll start to learn what a baseline HV and IV is for the various commodities), go to their price charts for a particular option month. There you will find how IV behaved for the December corn contract, for example, for a decade or more. Very useful.


Last edited by CafeGrande; January 29th, 2014 at 12:40 AM.
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  #7 (permalink)
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Here's a small chart from ivolatility. Their data seems OK, their charts aren't very good, but you don't pay much for the service. It's a quick and easy way to flip through a bunch of commodities once per day and see where they've been and where they might be going.

This chart illustrates a comment I made above about the perils of selling relatively short-dated options in Nat Gas in early Dec. It may have seemed like a good trade, highest IV in a year, big gap in IV over HV, etc, but compared to the craziness that can happen in a cold winter, we were just getting started.

So, have a few years of data, and practice good risk mgmt, because you're still going to get caught in an "Oh #$*! market every once in a while.

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Evaluating Volatility

CafeGranda,

Thank you for the wealth of information here! I wanted to let you know I will be reading and digesting these posts as I am able today. I unfortunately still have a day job that often monopolizes my time, but I will reply here once I've reviewed it all. Many thanks again!

Greg

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This is probably going to reiterate what has already been said but compare HV with current IV. IV percentile works if you have a good broker or are willing to pay a little money. One other thing I use that works is check out OIC's website where they give the 52 week high/low for IV on stock (or you can go straight to IVolatility but you have to create an account so they can spam you) The closer the price is to the high, the pricier that options are and vice versa

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TOS Current IV Percentile



rmejia View Post
The IV Percentile (IV Rank) is what tells you if the implied volatility is high or low for the underlying. Two stocks with 90% IV are not equal. If stock A has an IV Percentile of 80% and stock B has an IV Percentile of 25%, Stock B with 90%IV is in the low end of its volatility range, and Stock A with 80% IV Percentile and 90% IV is in the high end (it has higher volatility).

Is there a way to display the Current IV Percentile on the MarketWatch tab in TOS? I can find ImpVolitility and VolIndex, but I don't see Current IV Percentile. Thanks.

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