Experts talk about warrants: historical volatility and implied volatility

For warrants, the volatility of the underlying stock price is one of the important factors affecting its value.

The volatility of the underlying stock price is generally measured by the volatility. There are two common volatility: historical volatility and implied volatility.

Historical volatility is the value of volatility calculated using past stock price data. The calculation method is: first obtain the price of the underlying stock from the market at a fixed time interval (such as daily, weekly or monthly); Secondly, for each time period, the natural logarithm of the ratio of the share price at the end of the time period to the share price at the beginning of the time period is calculated; Then, calculate the standard deviation of these logarithms, and then multiply it by the square root of the number of time periods included in a year (for example, if the time interval is selected as daily, then if the closed market is deducted, there are 250 trading days in each year, which should be multiplied by the root 250). The historical volatility is obtained.

Implicit volatility is the value of volatility that is inversely derived by substituting the warrant transaction price in the market into the theoretical price model of warrants. Theoretically, it is not difficult to obtain the size of implied volatility. Because the option pricing model (such as BS model) gives the quantitative relationship between the option price and the five basic parameters (underlying stock price, exercise price, interest rate, maturity time, and volatility), as long as the first four basic parameters and the actual market price of the option are substituted into the pricing formula as known quantities, the only unknown quantity can be solved, and its size is the implied volatility.

The historical volatility reflects the past volatility of the underlying stock price. However, because it is difficult to predict the volatility of stock prices, the prediction of warrant prices using historical volatility can generally not be guaranteed to be accurate. However, because there is no warrant market in the mainland of China at present, it is impossible to obtain warrant prices and calculate implied volatility. Therefore, warrant issuers and investors can only use historical volatility as a reference at the initial stage of warrant issuance.

After the warrants are traded in the future, investors can use the implied volatility to guide their investment. The main methods are:

1、 Trading volatility. Warrant investors can not only use the change direction of the expected underlying stock price to buy and sell warrants, but also profit from the change of the fluctuation range of the stock price. Generally speaking, volatility does not rise or fall indefinitely, but fluctuates back and forth in an interval. Investors can make profits by buying warrants when the implied volatility is low and selling warrants when the implied volatility is high.

2、 Compare with historical volatility to determine the timing of buying and selling. If the investor has decided on the buying and selling direction, he can compare the historical volatility with the implied volatility and buy (sell) warrants when the implied volatility is lower (higher) than the historical volatility.

3、 In addition, investors can also compare warrants with different remaining times of the same underlying asset through the implied volatility. The smaller the implied volatility, the cheaper the warrant will be, which can provide guidance for choosing the type of warrants.

Author: Jiang Yuyan, Guotai Jun'an New Product Development Department