De-Annualizing IV
Implied Volatility is the expected volatility of a given asset and can be used for ones advantage
De-Annualizing IV allows one to apply annualized IV and alter it towards ones desired time frame
As some may know, Implied Volatility or IV is an annualized figure, meaning we have to do extra work to get what we want
Applying IV
To gain a greater understanding of this topic we will be applying this method to SPY(461.90) as of 11/3/21
In order to get IV of our desired time, we first have to get the 1-day expected volatility and to do so we use the formula as follows
IV ÷ √256(256 trading days in a year) and will be 0.1245 ÷ 16 for our case, which gives us a 1-day expected volatility of 0.00778 or .78%
After getting our 1-day expected volatility we then use the formula as follows
IV ÷ √256 x √Number of Trading days in period and once applied to SPY will become 0.00778 x √22 which gives us 0.036497298 or a monthly expected volatility of 3.65%. We are using 22 in our formula since there is 22 trading days in a month.
Conclusion
After calculating our monthly volatility we can then multiply the desired asset by it to receive the range in which this asset will most likely stay at
For example, regarding SPY at 461.90 we can multiply it by 1.0365 or 0.9635 to receive the prices in which there is a 68% chance that the desired
asset will stay at. Regarding SPY this means there is a 68% chance of SPY closing between 478.75 and 445.
De-Annualizing IV allows one to apply annualized IV and alter it towards ones desired time frame
As some may know, Implied Volatility or IV is an annualized figure, meaning we have to do extra work to get what we want
Applying IV
To gain a greater understanding of this topic we will be applying this method to SPY(461.90) as of 11/3/21
In order to get IV of our desired time, we first have to get the 1-day expected volatility and to do so we use the formula as follows
IV ÷ √256(256 trading days in a year) and will be 0.1245 ÷ 16 for our case, which gives us a 1-day expected volatility of 0.00778 or .78%
After getting our 1-day expected volatility we then use the formula as follows
IV ÷ √256 x √Number of Trading days in period and once applied to SPY will become 0.00778 x √22 which gives us 0.036497298 or a monthly expected volatility of 3.65%. We are using 22 in our formula since there is 22 trading days in a month.
Conclusion
After calculating our monthly volatility we can then multiply the desired asset by it to receive the range in which this asset will most likely stay at
For example, regarding SPY at 461.90 we can multiply it by 1.0365 or 0.9635 to receive the prices in which there is a 68% chance that the desired
asset will stay at. Regarding SPY this means there is a 68% chance of SPY closing between 478.75 and 445.
Disclaimer
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