Received a comment from Larry regarding historical volatility and implied volatility. Specifically he asked where one might find historical data as it relates to my comment that premiums are as good as they have been over the last three years.

To the first point; unfortunately, I am not sure where you would get historical data on Canadian companies. As for the second point, I draw my conclusions about current premium levels by looking at the MX Implied Volatility Index (symbol MVX). You can find this data on the MX home page. Note that current levels are over 20%, measured against historical trends in the mid teens.

The MX Implied Volatility Index is the Canadian version of the CBOE Volatility Index (symbol VIX). What I like to do is track the 200 day moving average of the index option implied volatilities and treat that as my normal volatility level. Current 200 day average is around 17%. Readings above that would imply higher than normal option premiums, which is when I would prefer to engage in covered call writing strategies.

I make the assumption that if index option premiums have gone up, so to have the premiums on the average stock. Unless of course, there is some company specific event that has suppressed premiums on a particular stock. At least with this approach I have less need to examine historical implied volatility trends on individual stocks.

As for historical volatility readings on individual stocks, this is something you could do on your own. The idea would be to calculate the standard deviation of a series of stock prices over a period of time. For example, let’s assume that you were to download from your favorite stock website, the last two years of closing prices on a stock you are interested in.

The next step would be to establish a return number for those calculations. If, for example, XYZ closed at $10 yesterday and $10.20 today. The return would be calculated as (10.20/10.00 - 1) or 0.20%. Calculate the daily returns (assuming you have downloaded daily pricing data) in the column next to the actual closing prices. Finally, you would calculate the standard deviation of those returns using the Excel STDEV formula.

One final point. Option pricing models typically use annual standard deviation as the volatility input. In our example, you have so far only calculated the daily standard deviation (again assuming you have downloaded daily closing prices).

To get an annualized standard deviation you simply multiply the daily standard deviation you just calculated by the square root of time. Which is to say, you would multiply the standard deviation number by the square root of 250 [Excel formula SQRT(250)]. The 250 number approximates the number of trading days in a year.

Hope this helps.