Monday, September 26, 2011

H-Vol vs I-Vol - options (%%jargon

Volatility measures the dispersion / divergence / scatter / spread-out among snapshots of a fluctuating price, over a period. Most intuitive and simplest visualization of the spread-out is a histogram. Whenever I have problem understanding volatility, i go back to histogram.

- Frequency of observations can be high or low, usually daily.
- The fluctuating price can be a stock, Interest Rate, Forex, Index, ETF...
- But the period's start/end date must be specified otherwise volatility is meaningless.

σh's start/end dates are always in the past. σi's start date is always today, and end date is typically 30 days later. In other words, σh is backward looking; σi is forward looking. Therefore only σi (not σh) can affect option pricing

σh's sample values are real snapshots. σi's "sample values" are unknowable. We predict that if we take snapshots over the next 30 days, stdev will be this σi value.

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New York (Time Square), NY, United States
http://www.linkedin.com/in/tanbin