The volatility of the price of the underlying security that is implied by the market price of an option based on an option pricing model.

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Implied Vol vs. Calibrated Vol

Consider the Black-Scholes model, in which the log stock return over a time period $\Delta t$ is given by $$ \log(S_{i+1}/S_i) = (\mu - \sigma^2/2)\Delta t + \sigma \sqrt{\Delta t} Z_i, \qquad Z_i ...
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58 views

Effect of vol smile on risk neutral probability of ITM

I was asked in an interview about how the vol smile affect the price of a binary option, which is essentially the Prob(ITM) under risk neutral measure. My thought is that the implied vol at spot ...
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29 views

Impact of Implied skew variations on future prices

I want to test the relationship between of the oil implied volatility skew and oil future prices. I'm lost regarding the method to test the relationship. I was thinking about a regression but I'm ...
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1answer
132 views

Rich Volatility, Poor Volatility

I have been thinking very hard about properly pricing volatility. Outside of naive AR,ARCH,GARCH forecasting model which employs past data to forecast future vol, how does one "fundamentally" value ...
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59 views

How to assess stock price movement from implied volatility?

Assume that: - The underlying is at 100 - The implied volatility of ATM call/put is 30%. Then, is it correct that expected 1-standard-deviation move over the next month is calculated as: $$100 * ...
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6 views

Will a back month leg in call calendar lose value if underlying goes down

If I buy a call calendar and underlying drops 5%, the front month short call will get further out of money and will lose value, resulting in a gain since I am short the front month option. What about ...
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206 views

Does higher vega imply higher IV and vice versa

If an option A has higher vega than option B, does that also mean that A has a higher IV than B? I understand that by definition, a higher vega means that A's price is more sensitive to its IV than B. ...
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55 views

If an option went down in value, how much is due to theta decay and how much due to fall in IV

Let us say that there was a stock trading at 100 and the 105 call was trading at 3 $. with 1 month to go Now stock went up to 104 after 15 days, and the call dropped to 2.80 $, to the call buyer's ...
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11 views

Will implied volatilities rise by same amount across time and across strikes in lieu of an earnings report or a news event

It is said that implied volatility of an option rises leading up to an earnings report or a pending news event like FDA trial, a possible takeover,elections(?) etc. My question is, implied volatility ...
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125 views

How to approximate the time to mean reversion for implied volatility

Given an option and its implied volatility, and also the mean value of the implied volatility over the last 30 days, if we find that the current IV is significantly (> 1 std dev.) away from the mean, ...
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69 views

Why a calendar spread is a preferred strategy in a low volatility period

What is it about a calendar spreadas opposed to other spreads(e.g vertical spread) that makes it such a popular strategy for a period of low implied volatility? Is it that when low volatility turns ...
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1answer
43 views

Why implied volatility is less for the back month option even though the back month option is more expensive

Why is the implied volatility of this option at the ATM strike (18$) greater in the front month (March) than in a further month (Oct). The Oct month has 43%, but the front month has 54%. Should not ...
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204 views

Why an option has sometimes and implied volatility greater than 100%?

Sometimes, in an option chain, the implied volatility of an option is greater than 100% . How is this possible? I mean, it is possible for 100$ stock to increase more than 100%, but not decrease more ...
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3answers
115 views

Why does the volatility smile flatten as maturities increase?

First, I can't find a purely "financial" explanation for this. Also the only mathematical explanation I've found so far was using the large deviations theory, which is quite complex. Is there a ...
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37 views

Implied Vola from historical option prices

I have daily Close data of ODAX-options, obtained from ivolatility.com. One third of the daily data shows premiums that are just above the inner value. Even when inserting an implied vola of almost ...
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57 views

Volatility Surface Constituents, do's and dont's

Recently I have been working a lot with implied volatility and volatility surfaces. The basic idea is easy to follow: 1) Gather market prices of options at different (Strike,Expiry) 2) Calculate ...
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12 views

How does implied volatility of puts relate to strike price in presence of negative news? [duplicate]

There is a lot of literature available but i don't kind understand that if there is a negative news about a stock with the traders why do puts with lower strike tend to have higher implied volatility ...
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46 views

Implied Volatility Calculation for Deep In The Money Calls, Numerical Issues

I have two implementations for finding the implied volatility under Black-Scholes formula. One is bisection and the other is brent's method. (I know Newton-Raphson is popular due to speed and will ...
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1answer
134 views

Some questions about implied volatilities and how to generate theoretical prices when market prices are not available

I am building a little Excel file that take some option prices in input and plots the volatility smile/surface. I have a script that reads market prices from the option chain for 3 different ...
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1answer
78 views

Commonly used vol surface calibration model in the industry

I have 2 questions: What is the most commonly used equity option pricing model? I learned jump diffusion at school, read about Hensen and a few other models online. I am actually only calibrating ...
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2answers
106 views

VIX-implied Volatility calculator

Does anybody know any implied volatility calculator for VIX Options, possibily in Matlab? For Vanilla Options, I'm currently employing this function which is very fast and reliable (much more than ...
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50 views

How do I track implied volatility of specific delta?

I'm a newbie with respects to volatility trading and options. I recently purchased a book on the topic called "Trading Implied Volatility -An introduction" by Simon Gleadall. It's been one of the most ...
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112 views

Historical Implied Volatility Calculation

I'm trying to calculate implied volatility for the FTSE 100 for the last few years. I have all the end of day data from LIFFE for the last few years. I have combined the data by weighting the ...
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56 views

Why IV shares an inverse relationship with underlying

Why does implied volatility usually fall when underlying rises and rises when underlying falls? Implied volatility is a length of one standard deviation. From this definition, is it possible without ...
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111 views

Relation between IV and SD

In option pricing, volatility naturally appeared through the Black-Scholes (BS) model where it was a coefficient for the linear diffusion term $\sigma S\,\mathrm dW_t$, and as such represented the ...
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128 views

Is there a better way to price options than with historical volatility?

I know that annualized historical volatility calculated with closing prices is a much rougher estimate than implied volatility for the correct "volatility" parameter in options pricing models. ...
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118 views

Implied volatility and pricing of vanilla options

As far as I understood, implied volatility (IV) is a lucky parametrization of the vanilla option's price. That is, instead of deciding how much the call worth now, you can decide on its IV and put ...
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55 views

Vanna-Volga method to infer vol surface with just few realtime tick data

My broker gives me the opportunity to get realtime tick data for up to 50 fields. Since I would like to monitor option chains, this amount of data is very limited. Suppose I am interested in ...
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172 views

How to exploit calendar arbitrage?

Say we are looking at European Call options in a toy environment with zero deterministic intereset rates, a stock paying no dividends, no repo rates etc. Let C(T,K) be the price of a call with expiry ...
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231 views

What is an efficient method to find implied volatility?

I have a code that finds the implied volatility using the Newton-Raphson method. I set the number of trial to 1000 but sometimes it fails to converge and doesn't find the result. Is there a better ...
3
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1answer
175 views

SABR calibration: simple explanation and implementation

I would like to learn more about the SABR model and ho it is used in modeling smiles in equity, FX and rates markets. How would you explain the process and its implementation in simple steps? Any web ...
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3answers
214 views

forward implied volatility skew

I would like to calculate implied forward volatility skew. I have stochastic volatility monte carlo. What kind of payoff do I need to price and how to use Black() formula to calculate the implied ...
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2answers
57 views

Is it possible that a security with a positive variance can have a required return that is less than the risk free rate?

I'm not sure of the answer but I think it's possible. What I don't get is what characteristics this asset would need to have and why it would mean that an investor would accept a return less than the ...
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2answers
163 views

Is there a good closed-form approximation for Black-Scholes implied volatility?

While the solution for IV can certainly be reached using numerical search methods, I wonder if a high precision closed-form approximation exists. For example, there is a very robust (precise within ...
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109 views

What makes investors risk averse?

There are some regularly-occuring events that coincide with a rise in the implied volatility of an asset. For example, in advance of an firm's annual earnings report, it is typically expensive to buy ...
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103 views

Nested volatility

The introduction VIX options makes the concept of "volatility of volatility" a real life concept. The idea of "nested volatility" seems interesting, and I am wondering if there are any academic ...
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1answer
358 views

How does Volatility Pairs Trading work?

I've read some material related to pairs trading for equities and I understand the process of finding non-stationary pairs price series that can be cointegrated to form a stationary series. The basic ...
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1answer
90 views

Why doesn't VG flatten volatility skew for short term options?

The VG process, from my inexpert point-of-view, seems to nearly perfectly model equity distributions. For longer term options, there is little to no volatility, skewness, or kurtosis parameter skew. ...
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35 views

How to compute return of a variance swap?

How does one calculate the investment of a zero initial investment asset, specifically a variance swap? In this asset the payoff is given by the difference between the realized variance in a certain ...
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67 views

Underlying changes impact on implied volatility

What are some valid techniques that can be used to simulate how changes in the underlying are most likely to impact implied volatility along with the skew of all strikes for options with the same ...
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1answer
175 views

Does Implied Volatility always exist?

I am considering a simple Heston Model Market with one risky and one riskless asset. The dynamics of the riskless asset is simply $dB_t=r*B_t*dt$ The dynamics of the risky asset is as follows, $ ...
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593 views

How can I calculate the strike price or implied volatility from a given delta?

I have calculated the implied volatility for all strikes of a certain product (options on futures) and approximated the ATM volatility. My question is how can I figure out the implied volatility for a ...
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176 views

Is the market really Normal. Is Implied Volatility Historically Correct?

Ok. So as of 6/10/2014's market close the SPY was 195.6 and the VIX closed at a ridiculous recent low of 10.99. Now because the VIX (IV) is the implied volatility of 1 month contracts on the SPX and ...
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154 views

BInary Option implied volaltility

How is implied vol calculated if the quoted prices are out of the range for any possible volatility? E.g. Current quote on CBOE for options expiring on Aug 16, 2014 ...
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1answer
385 views

Why parameterize the Black Scholes implied volatility surface?

I know that SVI volatility surfaces are very popular among financial practitioners. I understand that this is not really a model for some underlying asset (such as Black Scholes, Heston etc.) but ...
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3answers
292 views

CDS Spreads and Equity Volatility

Why does CDS spreads track the implied volatility on equities? What is the fundamental relationship that would keep the two inline from deviating too far from each other? My speculation: Could it be ...
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1answer
453 views

estimate implied volatility using newton-raphson in python

I am trying to calculate the implied volatility using newton-raphson in python, but the value diverges instead of converge. What is wrong with the code? ...
2
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2answers
131 views

The implied volatility surface and the option Greeks - to what extent is the information contained in their daily movements the same?

What is the link between option Greeks (i.e. vega, delta, gamma, theta) and implied volatility surface (IVS) movements? Could you say that their 'information content' is the same. i.e. that out of ...
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157 views

What equation will convert implied yield volatility to implied price volatility?

I am trying to figure out how to turn implied yield volatility of a short-term interest rate into implied price volatility. Is there an equation to do this? I have come across the equation for a ...
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977 views

Volatility arbitrage - how is the profit extracted?

Is there any paper that describes in detail how the profit is extracted in directional volatility bet (vol arb)? I mean in the case that I bet the realized volatility will be lower than currently ...