I'm trying to calculate implied volatility for the FTSE 100 for the last few years.
I have all the end of day data from LIFFE for the last few years. I have combined the data by weighting the implied volatilities for each strike by their volume traded and distance from the underlying close price. I then took the mean of the put and strike composite IVs.
However, The way I am currently calculating the data, I am always using the nearest expiry, and then moving on to the next expiry the next day, which is leading me to some fairly strange numbers. For example the day before the september expiry, IV was 40%, but the next day, when I start using the october expiry, volatility was down to 9%, which is clearly not true. I'm not sure if I should be using more than one expiry to calculate a days composite IV.
Here is what I get:
But I would expect something a bit more like this: https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1416609064419&chddm=113953&chls=IntervalBasedLine&q=INDEXEURO:VFTSE&&ei=Jb1vVOuPJ-SDwAPu24DoDQ