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How is historical implied volatility calculated?
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How is historical implied volatility calculated?

  #21 (permalink)
Trading Apprentice
San Francisco, CA
Futures Experience: Master
Platform: Bloomberg, IB
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VIX Calculation Step by Step
  1. Select the options to be included in the VIX calculation.
  2. Calculate each optionís contribution to the total variance of its expiration month.
  3. Calculate the total variance for the first month and the second month.
  4. Calculate 30-day variance by interpolating or extrapolating the two variances, depending on the time to expiration of each.
  5. Take the square root to get volatility as standard deviation.
  6. Multiply the volatility (standard deviation) by 100.
  7. The result is VIX.

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  #22 (permalink)
Turn the machines back on
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Can you demonstrate an example of the calculation? Without a math background, it's hard for me to visualize how to implement some of the steps, like #2

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  #23 (permalink)
Patience my young padawan
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Options historical data

Well in order to do this I understand one would need historical data of options... The only source I've seen is CBOE but it is very pricy for a given set of years.

Even if you get past the data issue I am not sure on which platform you could backtest this data (for instance Ninja only has price and volume data...). I'd like to backtest it in a multi-instrument strategy which makes it even a bit harder. If anyone has input on this or has tried it before it would be very much appreciated.


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  #24 (permalink)
Market Wizard
Kyoto, Japan
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There are VIXes for all the mega assets, such as Apple. Each strike has its own volatility, too.

While you are at it, you might want to explore the concept of future volatility, such as expressed by VIX futures.

You might want to get a subscription to LiveVol Core. It's not that expensive and offers probably all the functionality you need as for volatility. You can get it for free with certain brokers.

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