Ask the Institute

Ask the Institute Archive

DATE: June 10, 2013

QUESTION:

Is there a formula a trader can use to convert the stated volatility, also known as the annual standard deviation, to another period of time of their choosing?

ANSWER:
There is a formula involving the multiplication of three numbers that converts the stated volatility to another period of time chosen by the trader.  See Figure 1.  Multiply the stock price times the stated annual volatility times the square root of time, where the square root of time is the square root of the number of days to expiration divided by the square root of the number of days per year.  To learn more about how a trader might choose to use a stated volatility percentage to estimate the range of stock prices in the near future, view this week's segment of "Ask the Institute."

 

Figure 1 - Standard Deviation for n days = Stock Price  ͯx  Volatility  x  square root of time*

*Where square root of time = square root of n days / square root of days per year

  VIX Snapshot

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