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 Volatility : Let's price it !
Issued on September 05 2011 par Strategies-options.com
The best way to understand how it's done, is to do it !
A simple number to derive! But extremely important in the financial industry.
I - How to do it ? ■ DATA Open a spreadsheet Column "B" In cells B4="Day" Puis, - In cells B5, "=1" - In cells B6, "=2" - In cells B7, "=3" ..... - In cells B18, "=14" - In cells B19, "=15" Column C In cells C4, "Closing prices" Day 1: 100 Day 2: 102 Day 3: 98 Day 4: 99 Day 5: 104 Day 6: 102 Day 7: 103 Day 8: 100 Day 9: 98 Day 10: 101 Day 11: 97 Day 12: 95 Day 13: 96 Day 14: 94 Day 15: 95 Thus - In cells C5, "=100" - In cells C6, "=102" - In cells C7, "=98" ..... - In cells C18, "=94" - In cells C19, "=95"  ■ DAILY RETURNS Column E In cells E4, "Ln(P(t)/P(t-1)" Then, - In cells E6, "=ln(C6/C5)" - In cells E7, "=ln(C7/C6)" - In cells E8, "=ln(C8/C7)" ..... - In cells E18, "=ln(C18/C17)" - In cells E19, "=ln(C19/C18)" ■ THE SQUARE OF THE RETURNS Column G In cells G4, "(Ln(P(t)/P(t-1))²" Then, - In cells G6, "=E6*E6" - In cells G7, "=E7*E7" - In cells G8, "=E8*E8" ..... - In cells G18, "=E18*E18" - In cells G19, "=E19*E19" ■ DAILY VARIANCE One just needs to sum up the squared returns Hence: - In cells G23, "=sum(G6:G19)" - In cells G24, "=G23/14" ■ DAILY STANDARD DEVIATION One just need to take the square root of the outcome. Then: - In cells G26, "=sqrt(G24)" ■ ANNUALIZED VARIANCE Annualized variance is daily variance times 365 Hence: - In cells G29, "=365*G24" ■ ANNUALIZED STANDARD DEVIATION Annualized standard deviation (annualized volatility) is the square root of the final outcome. Thus: - In cells G31, "=sqrt(G29)" II - Final Results  Easy, isn't it ! Next : Volatility : Trading Formulae Previous: Volatility : A First Attempt OPTIONS 101 - INDEX OPTIONS 101 - CHAPTER I OPTIONS 101 - CHAPTER II OPTIONS 101 - CHAPTER III OPTIONS 101 - CHAPTER IV OPTIONS 101 - CHAPTER V OPTIONS 101 - CHAPTER VI Strategies-options.com |
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