When they say vol moves in root time. If one month AAPL vol is 17% what should the 2 month vol be? What is the calculation for this? Thanks in advance
Root time in term structure
- Thread starter TheBigShort
- Start date
Found this with an explanation and some simple math and charts.
https://sixfigureinvesting.com/2014/06/volatility-and-the-square-root-of-time/
https://sixfigureinvesting.com/2014/06/volatility-and-the-square-root-of-time/
- I'm assuming it is the square root of 17, which is about 4.12%.
- That seems right. A 1 month period would definitely be more volatile than a 2 month period.
Thanks, I have read this article but still can not figure out the math. If we use AAPL as an example (because it is liquid so should be correctly priced). One month vol is 18%. 2 month vol is 18.8%
.18*sqrt(2) = .25.... how are they getting 18.8%?
What "they" say actually means if 1 month vol moves X, 2 month will move X / sqrt(2) etc.
.18/sqrt(2) = .12. Still not 18.8%
Dude, it's the CHANGE in vol, that behaves in a root-time manner. E.g. 1 month changes by 1 vol, 2 month will change by 1 vol / sqrt(2).
I'm just curious, is the OP trying to create an indicator or study ?
I would imagine OP is trying to understand the term structure of vol. A noble task, truly.
Indeed. Trying to find some flaws in the less liquid underlyings term structures. Have you come across any flaws in term structures?