Volatility

The square-root-of-time rule

Converts between the annual percentages options are quoted in and the daily moves traders talk in.

σann=σdaily252≈16 σdaily\sigma_{\text{ann}} = \sigma_{\text{daily}}\sqrt{252} \approx 16\,\sigma_{\text{daily}}

Where

252≈15.87\sqrt{252} \approx 15.87
Rounded to 16 on the desk.

Assumptions

  • Independent returns. Trending or mean-reverting series break it, which a variance ratio test detects.

Sanity check. Sixteen vol is about a per cent a day. Never scale volatility by tt; only variance does that.

Where this is taught