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I am trying to calculate an implied one-day move value for an instrument given its historical volatility. While I am familiar with this formula for implied volatility to implied move:formula

and intuition suggests this formula would hold true also for historical volatility, I am given pause by the often large difference between the two. I am obtaining historical volatility from TradingView and thinkorswim, both of which use the formula and methodologies outlined in the thinkorswim link.

I am aware that historical volatility is backwards looking, but I am simply trying to calculate the expected move over a given period of time if volatility were to remain at the historical value.

In short, I am seeking assurance in the validity of using historical instead of implied volatility in the formula pictured above. And if one wishes, perhaps an explanation of (or resource on) this often glaring difference between the two? Thank you all.

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  • $\begingroup$ Are you familiar with the $\mathbb{P}$ and $\mathbb{Q}$ worlds? $\endgroup$
    – Bob Jansen
    Mar 31 at 7:42
  • $\begingroup$ @BobJansen Sorry, I don't believe so. $\endgroup$
    – Leafthecat
    Mar 31 at 14:30
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perhaps an explanation of (or resource on) this often glaring difference between the two?

IV is forward looking and should include some risk premium. My 2c is the best reference is "Volatility Trading" by Euan Sinclair; IIRC, "Option Trading", by the same author, is an introductory version.

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  • $\begingroup$ Thank you for the resources. Are you confirming also that you believe substituting historical vol for implied vol in the above formula is in fact accurate? $\endgroup$
    – Leafthecat
    Apr 1 at 15:38
  • $\begingroup$ @Leafthecat - what do you mean by accurate? : ) I'm not sure what you're using the formulae for. I often see them used to give an idea of the expected range over the next N-days. $\endgroup$
    – user42108
    Apr 1 at 19:46
  • $\begingroup$ Exactly that, expected range over the next N days :) $\endgroup$
    – Leafthecat
    Apr 1 at 20:33
  • $\begingroup$ OK. Should be easy enough to check which provides a more accurate forecast over your horizon. $\endgroup$
    – user42108
    Apr 1 at 21:32

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