Are high volatility stocks straddle underpriced ? Let's say the stock price is 100$, Option wise IV is 50% and DTE is 365 days. The ATF (forward) straddle IV is ~0.8 x IV or 40% (40$) The +1SD (compounded) is exp(+50%) or +65% (+65$) The -1SD (compounded) is exp(-50%) or -39% (-39$) The expected ±1SD range is therefore 104$ Vs twice the ATF straddle (80$) . 24$ or 30% difference. Or the compounding overstate the implied range ?
Interesting approach! I use a similar structure but with a slight twist to better adapt to recent regime shifts — especially when applying it within fuzzy or adaptive systems. Here's my HV formula setup: lookback = 21 log_returns = log(close / close.shift(1)) ema_returns = ema(log_returns, lookback) deviation = log_returns - ema_returns variance = ema(deviation ** 2, lookback) hv = sqrt(variance) What I’ve found helpful is: Comparing this HV to a longer-term average (say 63 days) to detect volatility compression/expansion. Feeding this into fuzzy rule sets or AI filters to adapt position sizing. Also, you're right — std deviation being centered on the mean can be misleading when returns are skewed. I sometimes adjust by anchoring around median absolute deviation (MAD) or using percentile ranges if I suspect fat tails. Have you tried normalizing your stdDev against rolling realized volatility bands or using entropy-based measures? Would love to hear how you're applying it — are you using it for entries, exits, or risk sizing?
Currently I am trying MAD such as ema(|log_returns - sma_returns|). It's less sensitive to outliers because we don't square the deviation. The lookback being DTE * 252 / 365. This MAD more or less correlates with the straddle. It gives me a 365DTE SPY straddle @ 79$ The current SPY 362DTE 615$ straddle is ~84$ Don't know how much volatility pts difference this is. We can convert the MAD to StdDev by dividing the MAD by 0.8 (± 17%) Actually the MAD to StdDev ratio isn't always 0.8 but that's a shortcut. 365DTE SPY closed 49% outside its ±compounded volatility Same 49% without compounding volatility. Much less for shorter DTEs (1/3). Same for more volatile assets. You're right about comparing the measure about its history, I believe that's what matters in the end. Relative Value. But I try to get a good basis for pricing the straddle. However I have a 287$ straddle for 365DTE NFLX But the market prices it twice as much. Biggest deviation I've seen. Not seen much. I also try to compare the volatility against ROC 16th, 84th percentiles.. But there is autocorrelation with the ROC so it's kind of biased right away. I've read probability wise ... The ATM straddle has 1/2% of ending OTM, 1/3 chance of ending ITM & 1/6 of ending ATM <-> ITM Currently I am just tinkering. Simply buying Calls & Puts without delta hedging xD The goal would be to buy options and beat the above odds. Or try delta hedging. Trading relative volatility. You went farther than me. Thanks for sharing
Well ... That's 362DTE NFLX Using StdDev * 0.8. No volatility compounding. Volatility compounding Using MeanAvgDeviation. No volatility compounding. Volatility compounding Still have to (re)check the code ... But obviously they don't compound ATForward since Put & call are symmetrical.