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Ask The Trader Guy: Two Different Histories of Volatility

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July 1, 2015
Ask The Trader Guy
Fredrik Broden

Hey, Trader Guy! What’s the difference between historical volatility and historical implied volatility?

Historical volatility is based on changes in the price of the underlying for some number of previous days. You can see a chart of historical volatility on thinkorswim Charts with the historical volatility study. By contrast, implied volatility is based on  the options’ price, and is calculated via an option-pricing model. No historical data is used to calculate implied volatility. However, TD Ameritrade’s thinkorswim® platform has a database of past options prices, and it’s possible to calculate the implied volatility of  the options for those dates. That’s historical implied volatility. You can see a chart of implied volatility for past dates using the ImpVolatility study.

When I look at an index-based ETF, sometimes the daily percent changes are different. If they’re not the same, is that an arbitrage?

No arbitrage there. While an ETF and the corresponding index have the same component stocks, the ETF has actual shares that are bought and sold independently, whereas the index is just a sum of the prices of the component stocks that don’t trade. At 3:00 p.m. Central, stocks stop trading, and the index price stops changing. But ETFs can still trade between 3:00 and 3:15 p.m. Central. If there’s a price change in those 15 minutes, a closing price can be different from the closing price of the index. The next day, the net change for the ETF and index is based on those different closing prices, with the index “catching up.”

I’m concerned about a massive power failure during trading hours. How can I keep on top of my positions and the markets if disaster strikes?

It’s good to hear you have your priorities straight in times of crisis. The most straight forward solution is a gas-powered generator into which you can plug your computer. But a more affordable option that doesn’t rely on fossil fuels would be 10,000 gerbils in a turbine.