how to calculate returns' volatility

J

johntsai90

hi,

I run a strategy on option trading. I know how to calculate the geomean for the returns, but i need to calculate strategy's returns of volatility. Any ideas?

For example,
Date/Return
10/1:-11%
10/2:-3.6%
10/3:-13.08%
10/4:-11.00%
10/5:2.80%
10/6:11.31%
 
Quote from johntsai90:

Date/Return
10/1:-11%
10/2:-3.6%
10/3:-13.08%
10/4:-11.00%
10/5:2.80%
10/6:11.31%
More...

9/30 $100
10/1 $89
10/2 $86
10/3 $74
10/4 $66
10/5 $68
10/6 $75

Not sure "volatility" of returns is the most important facet here.

That aside, how to calculate it depends on what you're trying to accomplish. If you want an "VIX"-like number, calculate the mean, then for each day take the difference between that day's returns and the mean, and square it. Let's call that "variance". Calculate the average of all variances, and then take the square root of that number.

Voila.

So in your case (all numbers approx) mean is -4%. The differences are -7%, +0.6%, -9%, +7%, +15%. The squared differences are 49, 0.4, 81, 49, 225. The average of that is 67. Square root of that is 8%.

Voila, encore.

Conceptually, that says (sweeping a great many assumptions under the rug, many of them dubious) that most days, the return is expected to be between -12% and +4%.
 
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