Backtesting
Thursday, August 29th 2019
Trading When Implied Is A Specific Amount Over Realized Volatility
ORATS has a data point that measures the implied volatility divided by the historical or realized volatility. This ratio can be used in the backtester.
Summary
ORATS has a data point called ivHvXernRatio, which measures the implied volatility divided by the historical or realized volatility. This ratio can be used in a backtester to only trade when the IV/HV ratio is in a certain range or above or below a certain level. The IV/HV is normally > 1, but currently, with the market so volatile, the IV is < 1 for the average of all symbols, at 0.9722. The one month ratio is 1.0801 and the year average for all symbols is 1.172. A backtest can be run to buy a straddle every time the ivHV ratio is below 0.85, for example.
ORATS has a data point that measures the implied volatility divided by the historical or realized volatility. This ratio can be used in the backtester, for example, to only trade when the IV/HV ratio is in a certain range or above or below a certain level.
We label the ratio ivHvXernRatio because it is the implied volatility at 30 days taking out the earnings effect, divided by the historical volatility for 20 observations (20 observations is about one month so it matches the IV). The ex earnings HV takes out the days around earnings announcement.
Normally, the IV/HV is > 1 since the market normally prices in a risk premium into the implied volatility over historical volatility. Currently, with the market so volatile, the IV is < 1 for the average of all symbols, at 0.9722. The one month ratio is 1.0801 and the year average for all symbols is 1.172.
For AAPL, currently here are the levels:
Below is a graph of the ivHV indicator and below that is the HV20day graph. It looks like the ivHV is low when the HV20day is high, which makes sense.
You can run a backtest to buy a straddle every time the ivHV ratio is below 0.85, for example. Here's what the input looks like:
Try it yourself with a free trial here.
Disclaimer:
The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors.
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