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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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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44 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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92 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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98 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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86 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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32 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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62 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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117 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 ...
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94 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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106 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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49 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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88 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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107 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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98 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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243 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
72 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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27 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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62 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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153 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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269 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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159 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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130 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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240 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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178 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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294 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? ...
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2answers
109 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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120 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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554 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 ...
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461 views

Trading spot volatility

I am reading a paper that very briefly talks about some volatility arbitrage strategies. It's so brief that I do not exactly understand how it works. It says one of the strategy is based on "short ...
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137 views

Price volatility and yield volatility

This question is a bit confused, but please bear with me. Now and then I see people use the terminology "price volatility" and "yield volatility" in connection with bond options. I understand the ...
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97 views

Weighted average implied optionlet/swaptions volatility

Let an implied volatility curve/surface is made up by optionlets or swaptions Black's implied volatility. If you wanted to price, say, a FRN with cap and/or floor, a CMS et cetera you would input the ...
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194 views

Why use implied volatility

First I'll describe the way I understood things so far from the literature, feel free to correct me here, and then I formulate some questions. I'd search through QSE, but haven't found so far similar ...
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4answers
170 views

Does an implied volatility always exist for a binary option?

I'm trying to compute the implied volatility of a binary option but I cannot get some of the strikes to reach a convergent solution using either a Monte Carlo pricing model or an analytical Black ...
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83 views

Volatility swaps historical data

I am preparing a study about Volatility and Variance Swaps. Does anyone know where I can found historical public data regarding this instruments? Thanks!
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112 views

Volatility tools / web sites?

Could someone give recommendations regarding volatility tools / web sites that they find useful? I am looking for information that my brokerage platform does not provide. Specifically, I want to see ...
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756 views

Delta Neutral / Gamma Neutral Positions

I've been trying to find out more about options positions which are both delta neutral and gamma neutral--created with some kind of calendar spread. Supposedly, such a trade will be perfectly hedged ...
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166 views

Lower bound of ITM Calls when computing Implied Volatility

Assuming the Black Scholes model and pricing formula of a European call option. Then, if the call is ITM, i.e. if $ln(\frac{S}{K})>0$, the $d_1$-term will go towards infinity as $\sigma$ goes to ...
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1answer
129 views

Derivation of the Stochastic Vol PDE

I'm trying to follow the derivation of the stochastic vol pde for an option price - as given in Gatheral (The vol surface), Wilmott on Quant Finance and many other places. As usual one starts off with ...
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1answer
256 views

what's the relationship between forecasted stock volatility and implied volatility?(option)

what's the relationship between forecasted stock volatility and implied volatility? I know that implied volatility is the volatility calculated by BS formula, is there any relationship between implied ...
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76 views

BS Implied Volatility under Normal returns

If I use theoretical prices under a normal valuation model, and I estimate their implied volatility using BLACK SCHOLES implied volatility, do I'll get corresponding log normal volatility?
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110 views

ITM Puts under negatively skewed return distribution (volatility skew)

I read Hull (2009) on implied volatilies. I understand that (given a negatively skewed return distribution) an OTM-Put is more worth than under a normal distribution and that a OTM-Call is worth less ...
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190 views

Distinguish between market makers and other participants?

Are there any known quantitative techniques to distinguish between market makers and other participants? I manually MFT, have no knowledge of these specialties, and may be observing phenomena that ...
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1answer
109 views

How to calculate implied vol for next trading day?

We can seem to get implied vol for a period from now to option expiration, but does anything tell us implied vol for the next trading day ? Like if fomc is tomorrow the next day implied vol would be ...
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2answers
343 views

Black-Scholes: Why the focus on volatility?

We know Black-Scholes is an imperfect model for options pricing. Why is so much of the analysis of its defects focused on implied volatility? The fact that IV varies for the same stock at the same ...
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284 views

European Swaptions: does implied volatility of swap rates decreases both with start and tenor?

Does implied volatility of swap rates decreases both with start and tenor? Given a Swaption price and a discount curve I calculate the swap_rate from the curve, then I define implied volatility as ...
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1answer
189 views

Why is the VIX computed that way?

The VIX as a clear definition as defined in this paper I am interested to know why they came up with this formula. I smell some reasonably complicated explanation here so any pointer to a paper ...
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249 views

Concave volatility smile

Under what circumstances can implied volatility smile be concave (ATM implied volatility higher than OTM put and call)? I know that a slight concavity is not prohibited by no-arbitrage... What are ...
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2answers
253 views

VSTOXX Implied Volatility Calculation

What is the industry consensus (if it exists) about implied volatility calculation for options on VSTOXX (OVS)? I've experimented with the following approach: Standard Black-Scholes VSTOXX futures ...
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1k views

Beta vs. Implied Volatility statistical arbitrage using options

Let two underlyings, $S_{1}$ and $S_{2}$, are correlated and $\beta$ is the slope of their returns linear regression, that is, it says how much $S_{1}$ co-variates with $S_{2}$ variance. For ...
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353 views

Implied volatility and greeks for american option with discrete dividends

What methods are available to calculate IV and greeks for an american option with discrete dividends, and how do they compare? Should I use Roll-Geske-Whaley and solve for a given option price?