**Part 5: How To Annualise Standard Deviation**.

After we know the definition and how to calculate HV, we’ll move on to its interpretation.

__Example:__

If it is known that the value of HV is 35%. Remember that this HV value is annualised, i.e. for one year.

As mentioned in the earlier post, assuming that price returns are normally distributed, about two-third of the time, an individual return would fall within one standard deviation of the mean, and about 95% of the time, an individual return would fall within two standard deviation of the mean.

That means, we can interpret that in one year, approximately two-thirds of the time, the stock returns would be between minus 35% and plus 35%. Or about 95% of the time, the stock return would be between minus 70% (= 2*35%) and plus 70%.

If the stock price is $100, in one year, the price would probably be between $65 and $135 about two-thirds of the time. Or about 95% of the time, the stock price would be within $30 to $170 range.

__How about for__

**one month**?Since the annualised HV is 35%, the estimated value of standard deviation for one month will be:

That means, in one month, approximately two-thirds of the time, the stock returns would be between minus 10% and plus 10%. Or about 95% of the time, the stock return would be between minus 20% (= 2*10%) and plus 20%.

If the stock price is $100, in one month, the price would probably be between $90 and $110 about two-thirds of the time. Or about 95% of the time, the stock price would be within $80 to $120 range.

__How about for__

**10 days**?With the annualised HV of35%, the estimated value of standard deviation for 10 days will be:

That means, in 10 days time, approximately two-thirds of the time, the stock returns would be between minus 7% and plus 7%. Or about 95% of the time, the stock return would be between minus 14% (= 2*7%) and plus 14%.

If the stock price is $100, in 10 days, the price is expected to be between $93 and $107 about two-thirds of the time. Or about 95% of the time, the stock price would be within $86 to $114 range.

__Note:__

Some people use the following formula to convert:

This formula is actually the same as the above formula.

This formula is based on the one mentioned in Wikipedia, as discussed in the earlier post (Part 5).

Continue to

**Part 7: Comparing HV**.

To view the list of all the series on “Historical Volatility”, please refer to: “More Understanding about HISTORICAL VOLATILITY”

__Other Learning Resources:__* FREE Trading Educational Videos with Special Feature

* FREE Trading Educational Videos from Trading Experts

__Related Topics:__* Understanding Implied Volatility (IV)

* Understanding Option Greek

* Understanding Option’s Time Value

* Learning Candlestick Charts

* Options Trading Basic – Part 1

* Options Trading Basic – Part 2

## 0 comments:

Post a Comment