Implied Volatility: Data, Indicators and Usage

Implied volatility (IV) is the market’s expectation of future moves. This article will show you a simple way to access Refinitiv Eikon data in Tradesignal, visualise it and scan for exceptional volatility in stocks and ETFs.  Replacing historical volatility by implied volatility will give you new insights to risk management and options trading.

Historical Volatility

Historical volatility uses historic market data to calculate the probability of future moves. We already have an article about historical volatility. It gave you an indicator code to plot a volatility projection cone on your chart. This article can be found here.

Basing the volatility calculation on historic data has got some downsides. The markets knowledge about future events like earnings and dividends is not used in this calculation, so it can lead to a very wrong estimation of future volatility.

Volatility projection Indicator

Implied Volatility

Implied volatility is determined by the current price of “at the money” option contracts. As options can be understood as insurance contracts against future events, the price of this insurance reflects the probability of a future event. If the insurance seller suspects that something important will happen in the future, upcoming earnings announcements might be such an event, he will raise the price for the option. This behaviour sets the price for forward volatility.

SPY at the money option price
SPY “at the money” option price

The screenshot above gives you an idea of current “at the money” option prices for the SPY ETF. You could currently buy insurance for a falling or rising market for about 5$ . This price is build by supply and demand of this specific contract. In a liquid market it reflects the markets consent on the expected move over the next 30 days. Nobody would sell you a call option for 5$ if he suspects that the market will rise 20 points.

Implied Volatility – Refinitiv Eikon

The raw options data, as shown above, can be used to calculate the implied volatility of a specific market. This is done by Refinitiv, and the expected annualised volatility is shown in Eikon.

Eikon SPY implied volatility
Eikon SPY implied volatility

Open the page SPYATVIV.U and you will get several measures for the annualised implied volatility for SPY.  The calculations are based on options with 30, 60 and 90 days to expiry.

As shown above the current implied volatility for SPY is about 16%. This represents a one standard deviation move to the up or downside over the next year.

Implied Volatility in Tradesignal

Using Tradesignal and the indicators given below you can grab this data from Eikon and display not only the current volatility level, but also it’s historic development.

Tradesignal implied volatility
Tradesignal implied volatility indicator

The implied volatility indicator, shown on the screenshot above, accesses the Eikon data for implied volatility and displays it on a chart. This is done with just a few lines of code.

Implied volatility indicator
Implied volatility indicator

This indicator is specifically designed to access the IV of US stocks and ETFs. If you need to access other markets please let us know.

Implied Volatility Projection

As we did in the article about historic volatility projection, we now can use the implied volatility data to do a probability map of future expected movements.

implied volatility projection
Implied volatility projection

The chart above shows you a volatility projection using one and two standard deviations. As an experienced trader you will surely see that this estimation is quite realistic for the current market. The implied volatility cone takes you down to 250 and up to 280 for the next 30 trading days, levels a technical analyst might define as support and resistance.

As these measurements have a 65% respectively 95% probability, something really important would have to happen to bring the market above or below these levels within the next 30 trading days.

The volatility projection has been plotted using the following indicator code. It uses a quick and dirty normal distribution assumption for future returns.

Volatility projection indicator
Volatility projection indicator

IV Percentile Indicator

The absolute level of implied volatility is important in risk management, as it gives you a good idea on what might happen in the future. But if you are trading options, it might be more important for you if current volatility is high or low.

IV percentile
IV percentile

IV percentile is a probability based indicator. A reading of 62.4, as shown on the chart above, means, that over the last year implied volatility has been lower on 62.4% of all days. The interpretation is quite straight forward: With a reading above 50% the edge lies on the selling side, for readings below 50% you might think about buying volatility.

The indicator is done with the code given below:

Volatility projection indicator
Volatility projection indicator

Implied Volatility Scanner

Using the indicators given above, you can build a scanner to search for US stocks and ETFs with high or low implied volatility.

IV percentile readings below 50 are marked in green and would qualify for a long vega strategy, the ones with a reading above 50 are marked in red, suggesting a short vega strategy.

Implied Volatility Scanner
Implied Volatility Scanner

Eikon IV symbol conversion function

To pull the implied volatility data for the corresponding symbol in the chart or in the scanner, the above indicators use the function given below. It is specifically designed for US stocks and ETFs. It uses the 30 day to expiry implied volatility provided by Refinitiv Eikon.

If you need to access other volatility data like other expiry dates or different markets, please get in contact.

Eikon IV RIC conversion function
Eikon IV RIC conversion function

Tradesignal® is a registered trademark of Tradesignal GmbH. Unauthorized use or misuse is strictly prohibited. Data by Refinitiv EIKON.
Copyright Terms of use:

Leave a Reply

Your email address will not be published. Required fields are marked *

Subscribe to this Blog