Definition
Volatility (σ) is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices. There are different ways of calculating volatility. At StockViz, we use Yang Zhang Volatility.
σ is one of the biggest contributor of option premiums. Understanding its true nature will help you trade it better.
Volatility spikes
Observe the volatility spikes since 2005. Even though the average is around 0.3, its not uncommon to have huge swings.
Fat tails abound
Trading strategy
Always try to be on the long-side of volatility. It might be tempting, while trading options, to try and clip the carry on θ-decay. But you should always be aware of the fat-tails of volatility that can crush many months of carry P&L overnight.
Related articles
- Forensics: NIFTY Options – Theta(θ) Decay (stockviz.biz)
- Forensics: NIFTY Options – Implied Volatility(IV) (stockviz.biz)
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