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Opposing Viewpoints: Historical Versus Implied Volatility


Options do price off history, but not to a tee.

Yesterday, one of my favorite Twitter peeps (or whatever they're called) asked me to take a look at this Mastercard (MA). What's so interesting? Well, a couple of things. The stock holding is the 200-day moving average (albeit a down-sloping one). And the IV is significantly below the HV - at least of the 30-day variety down below.

But that options comparison is a good example of why sometimes HV can produce misleading results. Mastercard had a couple big moves nearly a month ago. The graph above shows the 10-day HV, and as you can see, it popped up to 80. But those numbers are still in the 30-day HV calculation. As you can again see on the graph above, however, more recent HV has tapered and is now not much above 30. In fact, options are high, compared to volatility felt right here, right now.

And as long as we're on the subject, the only thing 30-day HV and 30-day IV have in common is the number "30." They don't cover the same time frame: HV looks backward and IV guesses forward. And they don't even measure the same amount of time: HV counts back 30 trading days, and IV looks ahead 30 calendar days - roughly 23 trading days, plus or minus.

So basically, when looking at HV, shorter time frames often give better pictures. And always remember its "history." Options do price off history, but not to a tee - especially when there's a not-likely-to-repeat gap or 2 still in the calculation.

No positions in stocks mentioned.
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