Volatility Cones · Desk

How the Cones Are Built

Realized vol, overlapping windows, percentiles, and the VolDex® overlay — the full recipe behind the chart.

The cone is a distribution of realized volatility at each horizon, with today's implied vol dropped on top. Here is exactly how each piece is computed.

Realized volatility

For a window of h trading days, realized vol is the annualized standard deviation of daily log returns over that window: take the close-to-close returns, compute their standard deviation, and scale by √252 to put it in annual terms. That makes every horizon directly comparable to implied vol, which is already quoted annualized.

Overlapping windows

To build a distribution we need many observations of each horizon. The tool slides the window one day at a time across the lookback, so for a history of T days and a horizon of h days it gathers T − h + 1 overlapping observations. Overlapping sampling is the classic Burghardt–Lane construction: it maximizes the number of readings at the cost of some serial dependence between them. That trade-off is well understood and is the standard way desks have built cones since 1990.

Percentile bands

For each horizon the tool sorts those observations and reads off five summary points — minimum, 25th percentile, median, 75th percentile, maximum. Plotted side by side across the seven horizons, those points become the cone: wide at short horizons where realized vol is noisy, converging toward the median at long horizons where it averages out.

The horizons

Seven fixed windows span roughly one week to one year of trading — from a 7-day horizon out to 252 days. Short windows capture event-driven, jumpy vol; long windows capture the underlying's structural vol regime. Reading one against another is the realized-vol term structure.

The VolDex® overlay and the tags

On top of the realized distribution sits today's Nations VolDex® implied vol — the clean at-the-money reading — at each horizon. The tag is mechanical: above the 75th percentile is RICH, below the 25th is CHEAP, in between is fair. Because the dot and the bands are both annualized vol, the comparison is apples to apples.

How it maps to the Nations suite

The cone is the historical-context layer under VolDex®. VolDex® tells you the level of implied vol; the cone tells you that level's percentile against realized history. Pair it with the VolDex® Term Structure tool (the implied curve across tenors) and the Skew Deconstruction tool (the implied curve across strikes) and you have implied vol read three ways — across time, across strikes, and against its own realized past.

Educational content from Nations Indexes. VolDex® is a registered mark of Nations Indexes. Overlapping-window estimates carry known serial dependence; figures are schematic. Nothing here is investment advice.