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Estimating Intraday Realized Volatility for Gamma Scalping

Article Quant Q&A · Author: Jordan Cairns
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Summary

The document asks how to estimate the realized volatility of an asset over a trading day from intraday tick data, in the context of estimating the profit and loss of a delta-hedged option. It starts from the approximation that gamma-related gains or losses depend on the difference between realized and implied variance, scaled by the option’s gamma. The central concern is whether changing volatility during the day makes a conventional standard deviation calculation unsuitable, and whether an intraday estimate can be compared with an option’s implied volatility.

The only answer points to a comparative study of realized-volatility measures across asset classes, including the performance of five-minute sampling. It does not summarize that study, provide a recommended estimator, or work through how to align realized and implied volatility inputs. The proposed P/L relationship is presented without discussion of discrete hedging, transaction costs, changing Greeks, or other effects that matter in practice. The document therefore identifies a useful research direction but leaves the estimation and implementation questions open.

Key ideas

  • The question concerns daily realized volatility estimated from intraday price observations.
  • Delta-hedged option P/L is framed in terms of gamma and the gap between realized and implied variance.
  • Changing intraday volatility motivates comparing realized-volatility estimators instead of relying on a basic daily calculation.
  • The response points to research comparing measures, including five-minute sampling, without summarizing its findings.
  • The document does not address practical effects such as hedge frequency or transaction costs.

Tags

OptionsVolatilityStatisticsDerivatives pricing
Full text
# Comparing Implied Vol. to Historical Vol. using intraday data


# Comparing Implied Vol. to Historical Vol. using intraday data












I'm interested in estimating what my profit/loss would be for continuously gamma scalping a delta hedged option over the course of one day, using historical intra-day price data.

I found an equation for calculating the profit and loss for a delta hedged option from. "option Trading Volatility: Trading Volatility, Correlation, Term Structure and Skew"Apr 24 2014 by Colin Bennett

the equation is P/L = 1/2 * GAMMA * (REALIZED^2 - IMPLIED^2)

For use in this equation, I am interested in calculating realized volatility over the course of a day, I have historical intra-day tick data mined from bloomberg to help obtain it.

I have read that traditional/classical standard deviation formulas are not accurate measures of intra-day realized volatility, because volatility changes significantly over the course of day. How can you take changing intra-day volatility into an account to get a more accurate calculation?

Once I have the intra-day historical volatility from a more advanced method, can the number I obtain still be used in the equation at the start of my post? Can I compare it to the Implied Vol. for an option, obtained from bloomberg?

Am new to these ideas, so I'd appreciate answers given low assumptions about my knowledge base. Read a couple options books + bachelors level knowledge in mathematics/stats. Links/Books recommendations are also appreciated.

## Answer by Nel (score 1)

https://quant.stackexchange.com/a/42747

It's been a long time but just in case someone else happens on this question, see:

DOES ANYTHING BEAT 5-MINUTE RV? A COMPARISON OF REALIZED MEASURES ACROSS MULTIPLE ASSET CLASSES

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.