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4 Different Quantifiable attributes that measure Risk and how same dollar investments can have different Risks

Here are different quantifiable attributes that measure risk: stock borrow / lending rate, historical volatility, implied volatility and margin.

#1 Stock Borrow / Lending Rate 

This is the rate at which it costs to borrow securities (if you want to sell them short) and the corresponding rate to lend securities to someone that wants to borrow them.  For example, this is quoted on Interactive Brokers "SLB Rates", SPY has a Fee rate of 0.25% and a Rebate rate of -0.25%.  While BITO has a Fee rate of 0.91% and a Rebate rate of -0.91%.  This means that it will cost less to borrow SPY than BITO and also that if you lend BITO you will make more money than lending SPY.  Generally, if things cost more to borrow, they have more risk associated with them.

#2 Historical (or Realized) Volatility

This number is calculated from historical prices.  It is basically the standard deviation of prices over a given time window and then normalized into an annualized number so that it can be easily compared.  For example, the 10 Historical Volatility for SPY is 8.8% while for BITO it is 58.5%.  In other words, BITO is more than 6 times as volatile as SPY.  In Interactive Brokers, these numbers can be found in Option Analysis -> Volatility Over Time -> Historical Volatility

#3 Implied Volatility

This can be found by using an options pricing model like Black-Scholes to fix all other variables (Forward Price, Interest Rates and Dividends) and solve for the uncertainty implied in the future price.  For Example in 28 day At-the-money (where the price currently is) put options for SPY are 1.6% of current price implying 12.8% volatility while BITO put options are 9.2% of current price implying 84.9% volatility.  In Interactive Brokers, these numbers can be found in the "Option Chain".

#4 Margin

This amount determines how much capital you will need to have a position.  For a Portfolio Margin account at Interactive Brokers, SPY requires 25%, while BITO requires 50%.  This means if you want to buy $100,000 worth of SPY you will only need to have $25,000 while for the same amount of exposure in BITO you would need $50,000.  In Interactive Brokers, you can see this number before you execute a trade or you can use the IB Risk Navigator application and see the Margin Sensitivity Section.

Final Notes

From the above notes, often Stock Borrow / Lending Rate and Margin can be similar for very liquid stocks.  The Historical (Realized) Volatility and the Implied Volatility are more unique and are the foundation for modern risk assessment.  These numbers can help illustrate that risk associated with investments can be very different than the capital allocated and can contextualize the magnitude of risk.  For example, if using Historical Volatility as a measure, $100 invested in BITO is more than 6 times as risky as $100 invested in SPY.

SPY - ETF for S&P 500 Index

BITO - ETF for Bitcoin Futures Fund

 




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