Volatility Cone
A technique for visualizing current option implied volatility relative to historic volatilities at different maturities. This technique, developed by Galen Burghardt, uses the range of historic volatilities for each option's maturity from, say, one month to two years or longer-depending upon the maturities of instruments available in the market. A historic volatility series is calculated for each period and 25% and 75% confidence intervals on either side of the mean historic volatility line are added. When the current implied volatility term structure is drawn on this diagram, the investor is able to determine how current option premiums compare to historic premium levels at various maturities.
The purpose of the volatility cone is to illustrate the ranges of volatility experience for different trading time periods.
For instance, a one-year span can be split into 1-day, 1-week, 1-month or 3-months periods.
Since crypto trades every day, this will give us
If we look at the past 30-day period and capture the historical realized volatility,
7D
77.3
61.5
82.5
103.5
142.4
32.7
50.7
10D
77.3
67.8
86.8
105.4
133.1
41.0
49.9
20D
73.8
79.6
90.7
101.7
108.5
58.0
78.9
30D
73.8
79.0
85.7
92.5
95.2
63.9
90.8
60D
72.7
73.3
78.0
82.6
84.3
64.6
81.9
90D
73.6
66.0
69.8
73.6
74.4
58.4
73.9
180D
75.6
68.3
70.1
71.9
72.5
64.9
71.8
365D
75.4
70.0
70.5
71.0
71.8
69.3
69.9
The graphical representation of the table above would look like a cone as shown below, hence the name ‘Volatility Cone’.
The way to read the graph would be to first identify the 'Days to Expiry' and then look at all the data points that are plotted right above it.
For example if the number of days to expiry is 30, then observe the data points (representing realized volatility) right above it to figure out the ‘Implied Volatility, Minimum, Maximum, 25/50/75 Percentile and Current'.
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