Volatility Comparison

The Volatility Comparison indicator allows you to view up to four volatility values on a specific equity in one study. You can modify your studies by using historical or implied volatility. The ability to modify the period of the study is only available when the type of volatility is set to historical. Last, some clients believe the graphs are easier to interpret by clicking smoothing to create a moving average of the raw data. To lessen the impact of outlier volatility movements increase the number of smoothing periods. Keep in mind; the downside to smoothing data is that moving averages can add a lag time to trading signals.

Volatility Comparison in Practice

The chart above shows the Volatility Comparison indicator set to display the 30- and 60-day implied volatility. While both implied volatilities have the same trend, you will notice that longer volatilities are more stable than short-term implied volatility fluctuations.

Volatility readings can provide an indication if the current premiums on option contracts are high or low. For trading purposes, high volatility readings typically correspond with expensive option premiums and low volatility readings typically correspond with inexpensive option premiums. An option trader might seek out strategies that allow for the sale of an option when premiums are high, while following long strategies when premiums are low.

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