Did you mean 30D IV?
Calculating 1SD move of the underlying
- Thread starter LM3886
- Start date
Yes! A couple points from my perspective, the 30Day IV is calculated per the CBOE VIX White paper method, which for equities is biased to the OTM PUTs, so the value is always elevated beyond the ATM IV of that time frame. Since you are seeking the move in the underlying, use of this will overshoot the expected move value you seek. So, if you are trading SPX, this is same as VIX, if you are trading RUT then RVX. (this is flawed, but may be useful if you only desire quick and very dirty) -- The ATM IV should be a better metric for the underlying IV. I use the longest term available which would expire at or shortly after the time frame you are seeking to pick the proper series. An exception is for very short terms during term structure contango! During these periods (most common), the very short term IV derivations is less reliable, so picking an IV from a longer term seems more prudent. -- During backwardation, is a different game with less certainty.
Regarding the "30D IV".... This is the value TOS uses in their Analyze Risk Profile tab. So, they seem to think it is "close enough" for their tools. (In their defense, if you understand this and are aware the values are elevated, you may adjust your trading accordingly. "Just because your handlebars are bent, does not mean you can't still steer adequately!"
Interesting. Is there any publication from TD that describes this? Or did you get the information from their customer service?
I am not aware of any documentation that covers this. Here is a screen shot that shows where TOS gets the value from:
I think we are currently in a term structure contango: short-term IV is lower than long-term IV. But if a longer-term (such as 30-day) IV is used to stress a shorter-term (such as a weekly) position, it's always going to make the shorter-term options to appear cheap and positions with long options will be preferred. Is that a flawed evaluation?