While doing simulations on volatility and the square root of time, I started thinking about how options experience time—is it calendar time, market time, or something in-between? The CBOE’s VIX® calculations use calendar time, a 365 day year, but most option gurus recommend using a 252 day year for volatility calculations—the typical number of trading days per year in the USA markets. When it comes to …
Previously I’ve done simulations, based on VIX futures, of volatility Exchange Traded Products (ETPs) back to 2004. In these simulations, I only generated the closing values, but since then I’ve had requests for open/high/low (OHL) values. I’ve extended my backtests to generate ETP opening and intraday highs and lows for many of the short and medium-term volatility funds—specifically VXX, VIXY, TVIX, UVXY (1.5X & 2X), …
It’s expensive to buy securities that track volatility. Their holding costs are so high that your timing has to be exquisite in order to end up with a profit. However, if you’re hedging a short volatility position, or poised to jump into the general market at a possible transition point a long volatility position might make sense. Consider this chart: Will the S&P 500 bounce …
The Cboe did not create the VIX® as an academic exercise, or as a service to stock market prognosticators everywhere. They created it because they wanted to make money on volatility. It took them two tries, but the Cboe succeeded in developing a volatility index that forms the backbone of a host of volatility products. The Cboe offers some of these products, but other companies have …
It was not obvious (at least to me) that volatility theoretically scales with the square root of time (sqrt[t]). For example, if the market’s daily volatility is 0.5%, then theoretically the correct value of volatility for two days is the square root of 2 times the daily volatility (0.5% * 1.414 = 0.707%), or for a 5 day stretch 0.5% * sqrt(5) = 1.118%. This …
