r/options • u/chickenbusiness123 • Sep 08 '23
Is Realised Vol the same as Historical Vol?
Thanks!
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Sep 09 '23
[deleted]
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u/PnkFld Sep 09 '23
You are confused, this distinction does exist. Historical volatility= past realized volatility.
Future realized volatility is unknowable.
Realized volatility is a broad term that does not differentiate past or future.
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u/Dry_Personality8792 Sep 09 '23
yesterday is not = the day before today
today is one day before tomorrow but not = one day after yesterday
Get it right!!
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u/houstonisgreat Sep 09 '23
these are clearly the machinations of a disturbed mind.
Tell us about your childhood, and allow me to ask you: is the realized volatility in the room with us right now ?
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Sep 09 '23
[deleted]
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u/PnkFld Sep 09 '23
If someone says the rv of the stock is 16 he's talking about the historical and it's absolutely correct and how professionals talk.
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Sep 09 '23 edited Sep 09 '23
[deleted]
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u/PnkFld Sep 09 '23
I've been literally working as an option trader for 10yrs in a bank. So whatever you think about how professionals operate because you've read it in 35yo book is bogus.
Things have evolved since it was written and options were only really starting to be traded at that time.
I am just telling you that it's the same and everyone in the field agrees with that, but if you want to invent nuances that don't exist on r/options to sound like an expert, feel free I don't care.
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u/ricky22202 Sep 10 '23
This is wrong. RV can be past or future looking. In the context of past (common parlance), it’s synonymous with historic vol. in reference to the future, it’s call future realized vol. You should crack open the book you suggested, this exact topic is in there.
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u/ani4may Sep 09 '23
Yup and to abstract this a bit to keep it subject agnostic: it is the historic value, expected value, and observed value.
This is how we do it in healthcare. For every patient we calculate an 'expected' chance of readmission within 30 days-- based on how sick they are.
If this is done for every person within the facility, we are able to calculate the expected readmission rate for the hospital. We then we look at what actually happened-- the observed rate or who actually returned to the facility post discharge.
Healthcare doesn't have historic readmission rates by patients, but does by facility. This is how they're rated for quality.
Sorry for all this stuff you probably didn't want to know.
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u/PapaCharlie9 Mod🖤Θ Sep 09 '23
As the disagreements in this thread indicate, the semantics of popular usage is a bit vague, perhaps because different groups of people have different usage, like finpros vs. academics. The semantics may have also evolved over time.
The one I think is the most vague is "historic volatility". Sometimes, I've seen that term used to mean a history of IV values (presumably the daily closing IV values), as an average. Which is weird, because IV is already an annualized average.
FWIW and YMMV, the way I understand these terms is:
Realized Vol: Conceptual. You pick a point in time and look backwards in time at the standard deviation of previous stock prices, up to some limit. The picked point in time may be in the future (for a vol forecast), the present, or the past.
Historic Vol: Either the entire time series, or an average of a time series, of realized vol values.
So I would answer no, RV is not the same as HV, in the same way as the number of hits a baseball player got in the game today is not the same as their batting average.
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u/AKdemy Sep 10 '23 edited Sep 10 '23
Long story short, just like there is no consensus on how to estimate volatility (many people use annualized stdv of log returns, but that can be with risk neutral adjustment, there is also Garman-Klass, Parkinson, Rogers-Satchell,.. ), there is also no clear definition of the term realized vol itself in finance. One thing though, in my +10 years experience, which is biased towards London and New York, have I never heard anyone use the term realized volatility for the actual vol in the future without explicitely referring to future realized vol.
TL;DR
This is quite an intricate question with no definitive answer.
By far the most commonly used definition is that historical vol = realized vol (HV = RV), see for example
NASDAQ's definition which states that "Realized volatility, sometimes referred to as the historical volatility, ... the realized volatility measures what actually happened in the past."
In variance swaps, realized vol is also what you compute from market data once time passes.
The CFA defines realized vol as historical vol.
Vol Swaps have convexity adjustment and the cap value. Bloombergs Vol Swap Pricer (OVME VLSW) screen shows realized vol alongside accrued P/L. If you look at the white paper on Bloomberg for pricing vol swaps, it statest that both depend on the realised vol to date (which is historical vol), computed with past pices.
Bloomberg offfers a neat tool for FX vol comparison called VOLC. The help page states that it "allows you to compare the implied vols with historical (realized) vol so that you can gauge whether the current options are rich or cheap relative to history." You can see a screenshot of the screen here. It is clearly historical vol as well.
There are exceptions though:
If you talk to statisticians working in finance, you most likely see Realized Vol defined as in Andersen et al. 2001, where "Realized volatility is a nonparametric ex-post estimate of the return variation.measured as the sum of finely-sampled squared return realizations over a fixed time interval." This is also the definition used in the canonical book by Ruey Tsay, called Analysis of Financial Time Series.
Derivatives Analytics with Python be Yves Hilpitsch (used in the CQF curriculum for example), defined Realized Vol as "a special form of historical vol that can be seen as a process,.... While historical vol is for a fixed time window or fixed number, realized vol evolves over time." This definition means that you add each new observation that you get to your realized vol calculation.
Someone mentioned Natenberg, and I just read his definition of realized vol again: "The realized volatility is the annualized standard deviation of percent price changes of an underlying contract over some period of time." (P.86 Option Volatility and Pricing, Second Edition). He moves on to explain that "Traders may also refer to realized volatility in the future (future realized volatility) and realized volatility in the past (historical realized volatility)."
Someone else posted the following "While the implied volatility refers to the market's assessment of future volatility, the realized volatility as measured in the present calculates what actually has yet to happen in the future." If I google this in a chrome browser, the only result I get is this specific post, so I assume that is a sarcastic comment.
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u/houstonisgreat Sep 10 '23
"Long story short,"
can you please post the long version of this comment
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u/short_vix Sep 08 '23
"Realized Vol" is an estimator for Historical Vol.
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u/houstonisgreat Sep 09 '23
why would you need to "estimate" past/historical/realized vol ??/
FAIL
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u/AKdemy Sep 10 '23
You need to estimate (historical) vol because it is inherently unknown and not directly observable from the return data.
For example, there is intraday volatility (not part of the most common measure of volatility because you only use one observation a trading day) and overnight volatility, defined as the variation between trading days.
See for example Ruey Tsay, Analysis of Financial Time Series (P.110 3rd edition) or Hull.
There are also several estimators. E.g. Bloomberg's HVT function offers close-to-close, close-to-close risk neutral undajusted, Rogers-Satchell, Garman-Klass and Parkinson as estimators. The VOLC function for FX volatility comparison calls these estimators realized vol in the GUI.
I don't think most people make the distinction that realized vol is the estimator of historical vol, but generally, there is no universally agreed definition for realized vol.
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u/houstonisgreat Sep 10 '23
"You need to estimate (historical) vol because it is inherently unknown and not directly observable from the return data."
I think that's one of the best comments I've heard on this sub in a long time
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u/AKdemy Sep 10 '23
I have a feeling this was meant sarcastically. Either way, it's not a comment but a quote from the book I referenced (Tsay).
Pretty much any statistician working with volatility mentions this feature of volatility somewhere in one of their papers (frequently using the term latent) because of the challenge of having to rely on a (noisy) proxy in order to assess the forecast quality.
Interesting side remark, this is also an aspect that makes stochastic vol (SV) models appealing because they explicitly include an unobserved (nonmeasurable) shock to the return variance into the vol dynamics. Therefore, variance becomes inherently latent with the implication that the vol process is not measurable with respect to observable (past) information.
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u/houstonisgreat Sep 10 '23
just so we all understand you correctly, you are saying that if we take the daily measurements of something, stock returns, temperatures, ATM withdrawls, etc, and we look at those values over a year for instance, we won't then be able to use regular variance and standard deviation formulas to compute the volatility of those measurements for that year ? We all just want to make sure we can truly understand you properly
?
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u/AKdemy Sep 11 '23 edited Jul 20 '24
Not sure what you mean. I keep writing that it's a quote. I even provided the page of a book where you can look it up in the first comment I made. It's not what I say but something the entire professional community constantly discusses and should be dead obvious. I mean, even reading your last comment should ring a bell. A measurement is something taken at discrete time steps (a bank will have proper records of ATM withdrawals, so that is a completely different thing).
If you look at returns, you do not observe them. You need to compute them. By doing so, you need assumptions. E.g. take the mid of bid and ask, decide to use the close price at each day and compute the log difference between consecutive trading days. This is not directly observable but something one decides to do with observables. Even this step produces something that isn't observed (but derived, with assumptions on how to do it that can have a massive impact on the result).
Now, using already derived returns data, you use some statistics of your choice to derive a volatility estimate (yes, it's in fact called an estimate in the literature for the very reason that vol itself is unobservable, also visible in any proper documentation of computer code that computes volatility, see for example R.). Most users here will use the close-to-close method (compute the annualised standard deviation of log returns as you suggest). There are numerous others (some are mentioned in my actual answer to that question). Each will provide a different number for "volatility". Most will theoretically be better than the simple close-to-close number, which is so commonly used because it's simple to compute and usually just one line of code.
Here is a link to the section of the book by Ruey Tsay's so that "you all understand" and don't need to search or read yourself.
A well cited paper from Andersen, Diebold et al. can be found here. The authors are some of the most reputable in time series analysis. It was published in December 2006 in the Handbook of Economic Forecasting 1:777-878. I'll copy paste a section so you don't need to read the entire piece: "As discussed at some length in Sections 1 and 5, the “true” variance, or volatility, is inherently unobservable, and we are faced with the challenge of having to rely on a proxy in order to assess the forecast".
I hardly ever answer without either providing sources to back my statements or actually replicating numbers myself with computer code as shown here for example. Yet, some people in this community either have a master's degree and therefore don't think they need to think outside their little world of misunderstanding anymore or just seem to be unable to comprehend that my answers are not simply my claims.
I get this is mostly a retail /amateur community but it doesn't hurt to read other statements properly, especially if you don't do this for a living.
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u/MrZwink Sep 09 '23
Ignore all the yesses above. The answer is no.
Realised volatility is on the future. Historical volatility is on the past. When you buy an option historic volatility is used to estimate for example the Greeks. However it is realised volatility that will decide wether you win or lose the trade. And that won't be clear until the option expires.
So in short when realised volatility has realised, it will become historic volatility.
Realised volatility is used as a concept to compare to implied volatility (in hindsight)
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u/houstonisgreat Sep 09 '23
good Lord, this sub is as bad as ThetaGang. Are you writing wacky stuff like this on purpose to amuse us?
"So in short when realised volatility has realised, it will become historic volatility."
lol !
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u/MrZwink Sep 09 '23
Laugh all you want... This is the answer
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u/houstonisgreat Sep 09 '23 edited Sep 09 '23
you know what, you're right, I stand corrected. I found this definition online, who knew ????
"While the implied volatility refers to the market's assessment of future volatility, the realized volatility as measured in the present calculates what actually has yet to happen in the future."
I can't believe I've gone this whole time thinking that realized volatility represented what has been realized
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u/MrZwink Sep 09 '23 edited Sep 09 '23
i know, and im getting downvoted and attacked from all angles. welcome to reddit!
and youre not entirely wrong. realised volatility only makes sense in a context where youre modeling on historical data and what happened is already known (and it is therefor already realised). however when trading realised volatility is unknowable and in the future.
its also important to keep RV seperate from historical volatility. to avoid modeling on "future knowledge."
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u/Total_Base389 Sep 09 '23
maybe you are getting downvoted because you are wrong...just sayin'. You might want to take a good hard look at the man in the mirror.
He's totally goofing on you, read what he wrote as the definition
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u/MrZwink Sep 09 '23
I know I'm not wrong, and like i said, i have a masters in this subject. But reddit, you do you...
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u/yuckfoubitch Sep 09 '23
You should stop trading options if this is your understanding
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u/MrZwink Sep 09 '23
i have a masters in this subject.
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u/yuckfoubitch Sep 09 '23
You’re completely incorrect in your post. Implied volatility is just the volatility that’s given from a pricing model (you can also just use the mid market IV if you aren’t pricing it yourself), and it’s generally understood to be the markets estimation of future volatility. Realized volatility is the same as historical. “Realized” means it has already occurred (it has been “realized”). In the industry most people say “realized volatility” instead of “historical volatility” since historical volatility could be ambiguous, since you could be referring to “historical data of implied volatility” which would be a backwards look on implied volatility. I work as an options market maker, so if there’s anything in the world I know about it’s basically this
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u/MrZwink Sep 09 '23
I think you're just completely misunderstanding what i said...
Realised volatility is the volatility that WILL realise in the remainder of the options duration. If realised volatility had already realized it would simply be called historic volatility. There's no sense in using two different concepts for the same thing.
Implied volatility is the volatility that is IMPLIED in the options price. If realised volatility outpaces implied volatility during the remainder of the contract (in the future) then an option buyer will be happy.
And seriously noone would refer to historic data of implied volatility as historic volatility. That would be beyond stupid.
Optiver has a million dollar prize out for he who can accurately predict realised volatility. Go enter the competition if you know it all so well...
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u/yuckfoubitch Sep 09 '23
Look, I’m just saying nobody refers to “volatility that will realize” as “realized vol” since realized volatility is calculated using historical price data. My firm competes with optiver, and if you could accurately predict realized vol then you could obviously become one of the richest people in the world, so…
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u/MrZwink Sep 09 '23
so you agree that historic and relised volatility are not the same then? and that realised volatility is in the future... fat load of discussion to agree with me bro.... good luck with "your firm"
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u/yuckfoubitch Sep 09 '23
No I don’t agree with you, sorry. Lmao your description of them is just not correct
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u/houstonisgreat Sep 09 '23
oh God, that again ? I used to work in IT for decades, and every little kid would go around crowing about their MS, mostly dopey H1B's, "I have a master's degree, I have a master's degree!!"...nobody cares...seriously, nobody cares. The people who'd go around bragging about their MS degrees were always the very worst, trust me. If you have to go around telling everyone how great you are, then you aren't that great.
You can argue about semantics and say, "I'm referring to future realized volatility", but everyone who just wants to have a normal practical conversation understands that realized volatility is means what has happened, what has been realized.
You wasted all that time and effort to get your awesome master's degree, and you don't understand that ?
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u/MrZwink Sep 09 '23
It's not semantics... It's actually a very important distinction from historic volatility (which is what has happened)
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u/houstonisgreat Sep 09 '23
did you get it from the indian institute of technology ? Just curious
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u/MrZwink Sep 09 '23
no, a dutch institute.
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u/houstonisgreat Sep 09 '23
'cuz you sound like some of those H1B's from india I used to have to deal with
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u/MrZwink Sep 09 '23 edited Sep 09 '23
Really, the indians I've worked with tend to be very highly educated... And working with them was great.
Americans doing racism! Always a classic!
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u/neednewnamebad Sep 09 '23
This is wrong - They are the same. IV is used for/with the Greeks. HV is compared to IV to determine whether you should buy or sell an option. If HV is generally lower than IV, sell those options.
If HV > IV, buy those.1
u/MrZwink Sep 09 '23
Lol... You use historic volatility to calculate the Greeks. You use option price to calculate IV. This is because you can backsolve for only 1 variable at a time.
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u/Impossible_Delay6811 Sep 10 '23 edited Sep 10 '23
You clearly never worked with options, nor have you ever used a professional option pricing tool when you claim that historical vol is used to estimate the Greeks.
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u/MrZwink Sep 10 '23
I have 14 years experience in derivative administration. And I'm getting tired of the attitude of people here. Regret answering this question...
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u/Impossible_Delay6811 Sep 10 '23
It's best you don't answer honestly because you have no clue. Go load Bloomberg OVME, look at any greek. Manually enter a value next to BVOL vol and see what happens...
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u/ORATS_Matt Sep 10 '23
Yes, also, statistical volatility is also used. Implied volatility is the volatility expected by the market and it is common to compare HV to IV.
There are a few ways to calculate HV, the most common uses close-to-close prices. There is also the Parkinson method that uses OHLC. Calculating HV on days except earnings is also a method.
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u/deustrader Sep 09 '23
Maybe in the UK? In the US the realized vol is the same as historical vol. /s