Something wrong with volatility

E

earth_imperator

Something wrong with volatility

Volatility means StdDev expressed in percent by multiplying StdDev by 100.
StdDev is the standard deviation around the mean. It's in the original unit, ie. in our case the price.

BUT since volatility is a percent value, one thinks multiple volatility values can be compared
to each other since they all are percentages, ie. same unit.

But I think this is a wrong thinking as the underlying StdDevs are dependent on their respective mean values, so they (volatility and StdDev) are IMO not comparable to other StdDevs and volatiliites!

Ie. does an IV of 120 mean the same to two different underlyings, one with Spot=100 and the other with Spot=200 ?

I think there ought to be found a new metric that allows such comparisons.

What do the experts think about this?
 
This is part of the volatility conspiracy.

by doing this the market makers have obfuscated the idea of infinite gamma to trick the masses into trading options.
 
earth_imperator said:
Something wrong with volatility

Volatility means StdDev expressed in percent by multiplying StdDev by 100.
StdDev is the standard deviation around the mean. It's in the original unit, ie. in our case the price.

BUT since volatility is a percent value, one thinks multiple volatility values can be compared
to each other since they all are percentages, ie. same unit.

But I think this is a wrong thinking as the underlying StdDevs are dependent on their respective mean values, so they (volatility and StdDev) are IMO not comparable to other StdDevs and volatiliites!

Ie. does an IV of 120 mean the same to two different underlyings, one with Spot=100 and the other with Spot=200 ?

I think there ought to be found a new metric that allows such comparisons.

What do the experts think about this?
More...
Did a quick research on the net. I think one better should use a different metric, as suspected.
Ie. this one: Coefficient of variation (CV), also known as Relative standard deviation (RSD).
The coefficient of variation (CV) is defined as the ratio of the standard deviation to the mean.

An interesting field text that confirms this: Coefficient Of Variation: A Better Metric To Compare Volatility

There are two formulas: one for Normal Distribution and one for LogNormal Distribution: see the wiki page in first link above.

Wikipedia says also this:
The coefficient of variation is useful because the standard deviation of data must always be understood in the context of the mean of the data. In contrast, the actual value of the CV is independent of the unit in which the measurement has been taken, so it is a dimensionless number. For comparison between data sets with different units or widely different means, one should use the coefficient of variation instead of the standard deviation.
More...
 
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newwurldmn said:
This is part of the volatility conspiracy.

by doing this the market makers have obfuscated the idea of infinite gamma to trick the masses into trading options.
More...
Indeed, the VIX and the many others (like UVXY, VXX, UVIX, VIXY etc.) based on the VIX could be totally flawed... :)
 
Yes. All the options and volatility products are deliberately mispriced. It’s how the banks make their money. It’s not known in the financial press because Biden is covering it up - but SVB failed because of its equity out exposure and volatility marks on them. The CBOE put them out of business to silence them.
 
People won Noble Prize for it hence your assumption has bias.

ach, gach(1.1), tarch. what a nightmare back in the days when studying, was all mystical words for me.

if my memory is correct, stddev gives you a confidence interval. VIX is the product of one-month option of SPX 500.
 
My observation / experience / tests:

When creating a sorted options volatility list, and

1) using the CV formula for LogNormal,
then it does not make any difference whether one uses the IV or the CV, ie. same result.

2) But when using the normal CV formula (ie. not LogNormal), that's
CV = IV / 100.0 / optionPremium * 100.0
then this CV list differs from the IV list.

3) But if one takes the stockPrice instead of the optionPremium then again the lists are the same.

(In all the above 3 cases IV (actually IV / 100) was used for calculating the CV, not HV.)
The formulas are on that page: https://en.wikipedia.org/wiki/Coefficient_of_variation
 
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