Part 4: Understanding #OptionsBasic for #Nifty #BankNifty
In previous threads, we understood Intrinsic/Extrinsic value of options, how to achieve greek neutrality, risk management and how to define cheap or expensive options. Now
What Is Historical Volatility (HV)?
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Historical Volatility is a statistical measure of the dispersion of returns for a given security or index over a given period of time. This measure is calculated by determining the average deviation from the average price instrument in the given time period.
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Using standard deviation is the most common, but not the only, way to calculate HV. The higher the historical volatility value, the riskier the security. However, that is not necessarily a bad result as risk works both ways - bullish and bearish.
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What it does measure is how far a security's price moves away from its mean value.
For trending markets, historical volatility measures how far traded prices move away from a central average, or moving average, price.
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This is how a strongly trending but smooth market can have low volatility even though prices change dramatically over time. Its value does not fluctuate dramatically from day to day but changes in value at a steady pace over time.
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