Volatility Difference

The Volatility Difference indicator allows you to view the difference in volatility between two different volatility readings. You can choose between historical volatility, and the 30-, 60-, and 90-day implied volatilities. When using historical volatility to have the addition choices of selecting a specific period of time and price source (open, high, low, close, average price). 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 Difference in Practice

Comparing differing volatility readings can provide you with insights into the market and a potential opportunity to trade based on the convergence of volatilities. As an example, suppose that you were comparing the 30-day and 60-day implied volatility levels for the same stock. If the 30-day volatility levels where higher than the 60-day volatility levels, this could potentially serve as a clue that the market expects some factor to have an impact on the stock price volatility in the near future.

Additionally, the upper and lower bands can be used to display levels where the difference between the volatilities reaches an extreme. When two volatilities vary widely from each other it's possible that the volatilities will converge. Depending on the volatilities being studied a trader could look for opportunities that would allow them to capture the price change in the option due to changes in volatility.

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