Tradespoon’s technology bases predictive analytics on Statistical Analysis in order to serve our traders. In this section, we look at Historical Volatility versus Implied Volatility, and why it is important in Statistical Analysis. We also review how Historical Volatility and Implied Volatility are affected by Standard Deviation, Bell Shaped Curve and Probability Analysis.
Historical Volatility can be defined as the realized Volatility of a financial instrument over a given time period. Generally, this measure is calculated by determining the average deviation from the average price of a financial instrument in the given time period. Historical Volatility shows you the measure of underlying asset changes in the past.
Implied Volatility is computed using a model and can be defined as the estimated volatility of a security’s price. It is determined by the underlying options data that will expire in the future. This means that the Implied Volatility shows you a glance into the future.
Note the Bell Shaped Curve graph in Figure 24A for rolling two die. Historical Volatility, or Historical Statistical Analysis, will show that you will get a seven almost 70% of the time and you will get either a six or an eight 40% of the time. When predicting, you will know that six, seven or eight will come out more often. In that same way, you can also trade options. Certain strike prices by certain expiration dates will come out more often than the others.
Furthering this concept: based on the 1 Standard Deviation for options in the Probability Calculator, you can see that certain Strike Prices such as the µ depicted here will come out 68% of the time. Based on Historical Data or Implied Volatility, this means that a certain stock will move to a certain Strike Price by the expiration date 68% of the time. 1 Standard Deviation of 68% Probability for stock reaching Strike Price µ by certain date.
Tradespoon’s Probability Calculator provides Support and Resistance based on Standard Deviation Analysis, as well as the Trend which gives you the directional bias. The top part of the Probability Calculator is based on Implied Volatility and the bottom part is based on Historical Volatility analysis. In Figure 24C, the Support is $49.76 and $51.94 and the Trend is predicted as 9 and 8.