Google Sheets Volatility Calculator
My Google Sheet will give you a stock's realized volatility in seconds
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- Calculates realized volatility for a given symbol
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- Graphs both price vs volatility
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Volatility Calculator
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What is Volatility?
Volatility is a measurement of uncertainty. You've probably already heard this term in an every day setting where referencing a behavior can be said to be "so volatile". The context may have been an observed behavior that was referenced as being wild and unpredictable.
In finance it's the same concept; the behavior in our case is a stock's price movement where it can be said to be highly volatile if observed to be unstable and unpredictable.
High Volatility
Low Volatility
The above examples show the difference between a stock that is highly volatile and one that exhibits low volatility.
While NIO's current vol is 87% it has spent almost a third of the time seen in the chart at or above 100% volatility. And the price range has gone from $10 to over $65 (+550%) in the same period.
Conversely, take a look at the Dow Jones ETF (DIA) pictured for the same range. It has a current vol of 10%, topping out at 30% but having a price range of $260 to $340 (+31%). This is the type of impact that high volatility makes to stock prices.
Why is Volatility Important to Traders?
Of all the inputs that go into valuing an option contract the two most uncertain factors are the underlying price itself and the volatility of the underlying — or more specifically the volatility that is expected for the underlying from now until the expiration date.
For option traders, volatility means opportunity. When considering the strike price of an out-of-the-money option contract, more volatility means more chances that the option will be profitable by the expiration date. For example, take NIO above. If you didn't have any insight into the volatility implied by the market prices, would you have bought a $50 call option that expires in 4 months with the stock trading at $12? It seems very unlikely to bet on the stock going up by 400% in that time. But when you know that prices are implying a volatility of 150% it makes the opportunity of that move seem more likely.
And because of the increase in likelihood that an option will be profitable, options that are perceived to have more chance of being in-the-money will be more valuable — hence the option premiums will be higher relative to a comparable stock that has low volatility.
Generally, higher volatility = higher option prices.
Implied Volatility vs Historical Volatility
When the volatility of the underlying is expected to increase, the demand for these options increases their prices in the market. The volatility that is derived from the option bid/ask prices is called the implied volatility. Implied volatility is calculated from an option pricing model where instead of generating a theoretical price, the model uses the market price as the input and reverses the calculation to derive the volatility.
Historical Volatility
Also known as "realized" or "statistical" volatility. Taken from the closing prices of a stock and shows where the stock's volatility currently is. Historical = past volatility.
Implied Volatility
Derived from the market prices of the option contracts. The estimate of where the market believes the stock's realized volatility will be from now until expiration. Download my option workbook for the method. Implied = future volatility.
Can You Profit from Volatility?
You've probably laughed at the old adage of buying low and selling high when being referenced to trading stocks. What is high and low? A stock can't trade lower than zero but it can keep going up and up.
Volatility, however, tends to be a mean reverting asset. Not all of the time, but certainly enough of the time to justify using it in your decision making. Take a look at this selection of implied volatility graphs for stocks, index and commodity ETFs:
AMZN Stock
SLV ETF
SPY ETF
TSLA Stock
I'm not saying that you can predict the direction of volatility at any point in time but the ebbs and flows of the movement tends to revert to an average — more often when volatility spikes. You will often see a huge bump in implied volatility followed by a drop.
These are opportunities many retail traders look for — selling options when volatility is high (expensive) and buying options when volatility is low (cheap).
Earnings Plays and the IV Crush
Macroeconomic events and surprise company announcements are example drivers for increased volatility. But these types of events aren't known ahead of time.
But we do know when publicly traded companies release their earnings results — every quarter of every year.
Every 3 months the top companies go through periods of increased volatility in the lead up to their earnings announcements. Company results aren't fully known until publicly released, which in itself creates uncertainty. As unexpected results can cause massive price swings, option traders try and anticipate post earnings stock price movements, which drives up the prices (and hence implied volatility) of the options that expire after those earnings results.
The first thing new option traders think of when it comes to earnings plays are long straddles. That is, buying a call and a put at the same strike price, which creates an each way bet on the stock so that if it does move wildly in one direction you'll be covered either way. This isn't a bad idea in itself but straddles come at a cost as you're buying the options. This means that the stock has to move more than the strike price plus the total premium you've paid. So, straddles are most effective when prices and volatility are low.
If volatility IS indeed low pre-earnings, then yes, long option strategies make sense. However, what you'll notice is that most stocks experience increasing levels of volatility in the lead up to their earnings release. This volatility greatly inflates the option prices making strategies such as straddles much less attractive — the more you have to pay increases your breakeven points and the amount the stock has to travel before you start making any money.
The IV Crush
Take a look at this graph, which will help me explain what an IV Crush is:
This is the at-the-money term structure for United States Steel (X). It plots the ATM volatility at each option expiration. This graph is telling you where the market believes volatility will be at each of the dates along the x-axis. Notice the massive spike 2 days out?
This spike is because United Steel are releasing their quarterly earnings numbers tomorrow after market. After the numbers are out and all the relevant information is now with the market, volatility is expected to drop in the following expirations. This drop in volatility is what traders refer to as IV crush (implied volatility crush).
Option traders look to take advantage of the vol crush by using short option strategies prior to the announcement and then looking to exit or buy back the options immediately after the earnings are out. These strategies are most effective when the stock price movement post earnings is less than the expected move as indicated by the implied volatility.
The two most common market neutral earnings plays are Short Iron Condor and Long Double Calendar spreads. Both are market neutral — meaning you're not biased in either direction regarding price movement. But both require the underlying stock to stay within the upper bounds of the strike selection.
If the earnings numbers are a huge surprise to the market then these levels will be tested and could result in the strategy hitting its maximum threshold in one move. I'm a bit cautious these days playing earnings due to the lottery style of trading it is — one day you're in the middle of a condor range and the next morning you're outside the long strike with little opportunity to adjust.
Iron Condors and Double Calendars are a key strategy used in the Trading as a Business course found on this site. If you'd like to know more, send me an email and start a conversation.
57 Comments
Alan Chua October 19th, 2009 at 4:03pm
Thanks so much Peter for a job well done. Your spreadsheet has helped me track volatility with ease.
Peter October 13th, 2009 at 7:05am
Thanks very much for the positive feedback engineer!
engineer October 12th, 2009 at 3:25am
This website describes the formula in depth and with details links.
http://www.neuralmarkettrends.com/2007/05/29/calculating-historical-volatility/
engineer October 12th, 2009 at 3:20am
I am an engineer and was studying pricing movement.
I used and applied the online formula found on googling historical volatility formula.
I was trying to compare my result with yours.
thanks for the great work. I like your chart.
I tried other place like Ivolatility.com
but it is a joke nowaday that they force people to sign up just to get a stock quote. and they try to charge you money for data download for historical volatility where people can use yours spreadsheet or programmers like us that can generate it from google or yahoo finiance api using very simple and basic programming calculation.
samantha October 9th, 2009 at 2:25pm
thanks very much for sharing this.
Great spreadsheet
Happy Trading!
Kenneth K. Seibel September 25th, 2009 at 12:09pm
Thanks a bunch for sharing your spreadsheet - you saved me many hours of work and your version is better taht the one I had intended to create!
Peter September 14th, 2009 at 6:25am
Thanks Hazem! You could check out iVolatility.com.
Hazem September 13th, 2009 at 11:36am
Great stuff... thanks for doing this and for sharing...
I have a macbook and vb macros don't work on mac office. Is there any other alternative? An online version or something?
Thanks...
Aydin August 27th, 2009 at 4:14am
Thanx!
Peter July 10th, 2009 at 7:32am
Hi Aydin, try this:
http://www.willowsolutions.com/tips/tips_2002_08.shtml
It does the same thing.
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