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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9
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1answer
137 views

Estimate Beta of CAPM from Implied Volatility?

In the CAPM theory Beta of asset $i$ are estimated in this way: $ \beta_i = \frac{\sigma_{im}}{\sigma^2_m} $ where $\sigma_{im} = \rho_{im} \sigma_i \sigma_m$ But all these data are historical data. ...
0
votes
1answer
72 views

pricing with implied volatility surface

I am a newbee in Quantive finance. supposing I calibrate a smoothing implied volatility surface with cubic spline now. A minute later I want to price K=100,t=1 option, can I just find the point on ...
6
votes
1answer
160 views

Extrapolating SVI

In his paper Gatheral presents the following parametrization of the implied total variance $w(k,T) = \sigma_{BS}(k,T)^2T$ $$ w(k) = a + b\{\rho (k-m) + \sqrt{(k-m)^2 + \sigma^2} \}.$$ Assuming that ...
4
votes
2answers
180 views

Tradable information from BS Implied volatility

These are two follow up questions to: Implied volatility as price transform I understand that the BS model is used as a 'Blackbox' that takes a market price and maps it in a 1to1 fashion to a 'BS ...
1
vote
1answer
77 views

Implied volatility as price transform

Implied volatility The way I understand it, traders often think of implied volatility as a transformed price. So in a way, the Black Scholes model is considered a 'model-free' blackbox that takes a ...
1
vote
0answers
80 views

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 ...
0
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0answers
28 views

Spotting humps in implied volatility term structure

Sometimes implied volatility term structure performs a hump shape. How can I measure the frequency of hump appearence? Basically, I have several years of daily data on IV TS, how can I count the ...
1
vote
0answers
203 views

Formula behind pandas.Options() implied volatility

I noted that implied volatility (IV field) from pandas.Options class is very different (especially, for out of money options) than what I compute with Black-Scholes model. (risk free rate is pulled ...
1
vote
1answer
163 views

Calculating historical implied volatility

I know that each individual option has it's own implied volatility, but how do you go about calculating the overall implied volatility for an underlying? For example when someone sais the IV of a ...
0
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0answers
96 views

Delta Volatility Surface Usage to value the option

I always find myself in the unknown charted territory when it comes to non-Linear Instruments. I come across the scenario, How to value the option using Delta Vol surface? Example I have CME traded ...
1
vote
0answers
30 views

Volatility Skew for Put and Call options [closed]

Given that the implied volatility follows volatility skew, which one has higher implied volatility? At-the-money put 40 (spot = strike = 40) or at-the-money call 160 (spot = strike = 160)? I am not ...
3
votes
2answers
143 views

SABR Implied Volatility and Option Prices

I am trying to understand the SABR model. Specifically, I am having difficulty to understand how to calibrate the model parameters, that is, initial variance, volatility of variance, exponent for ...
10
votes
3answers
381 views

Historical Volatility vs Implied Volatility Performance in Pricing Options

I consistently read on academic papers, when pricing options, using implied volatility is better than using historical volatility. Because, market is more "forward-looking" and historical data is "...
3
votes
1answer
330 views

Delta Hedging with fixed Implied Volatility or floating Implied Volatility?

When delta hedging an option until expiry at implied volatility, is it better to rehedge using the fixed implied volatility given by the option price upon its purchase (or sale), or to rehedge using ...
1
vote
1answer
55 views

Applying interest rate models for volaility rate

To what extent may the interest rate models be applied for modeling implied volatity? The story: I was checking different stochastic option pricing models for being able to replicate implied ...
3
votes
3answers
132 views

Implied volatility of a complex options position

Assume I have a "complex" options position like a straddle, strangle, or iron condor. In other words, several options traded together as a single position against one underlying asset (not a basket ...
7
votes
2answers
562 views

Why linear interpolation not appropriate for volatility surface construction?

We know linear interpolation is not appropriate for constructing a surface, but why? In the book, "Foreign Exchange Option Pricing: A Practitioners Guide", the author writes: native linear ...
4
votes
2answers
161 views

Bloomberg implied volatility smile for equities

I was wondering if someone knows how Bloomberg does their computations for the implied volatility smile for equities. As far as I understand, they use a lognormal mixture to model the stock prices. ...
0
votes
1answer
76 views

Citable source: Why implied volatility over dollar prices

I am aware of the reasoning of quoting vanilla options as implied volatilities rather than dollar values. However, I would like to have a literature reference where this is explained, to quote / cite ...
0
votes
1answer
421 views

Realized Volatility vs. Standard deviation of log returns

I am interested in calculating high frequency 5-minute intraday volatility. I am going to use the standard Realized volatility which is the square root of the sum of squared log returns. Given X is ...
5
votes
1answer
388 views

Is volatility for the next day forecastable? To any extent?

In a more general way: is there 1) a methodological approach to quantify the correctness of a model that produces a probability distribution for the, say, S&P 500 index return for the next ...
6
votes
1answer
226 views

How is implied volatility derived?

How to compute Implied Volatility Calculation? The above link shows that there multiple ways to calculate implied volatility. My question is that for most of the common data sources like Bloomberg, ...
0
votes
1answer
67 views

Interpreting and scaling of Realized Variance with sample data

I have some question about realized variance(RV) and I have some sample prices below to work with. You can run the R code below to build a vector of log returns. Three are 78 5-minute buckets in a ...
1
vote
1answer
73 views

Connection between implied volatily and implied probability

I am reading some lecture notes about Black-Scholes (BS) option pricing. Since the BS-formula is not supported by observed data because of the dependence of the implied volatility on the strik and ...
-3
votes
2answers
67 views

Approximating the IV of an underlying from Individual Options IV

Is it possible to get a calculation of IV from the volatility on components of the options chain? EG I have this data: ...
2
votes
2answers
406 views

How to interpret Realized Volatility and TSRV using R

I am looking at some high frequency data and I would like to know how to interpret and compare Realized volatility (RV) and Two Scale Realized Volatility (TSRV). References below. Given X is the log ...
4
votes
2answers
82 views

Implied volatility and nonconstant volatility

John Hull states in his text that "AS the maturity of the option is increases the percentage impact of nonconstant volatility on (option) prices becomes more pronounced, but its percentage impact on ...
3
votes
1answer
218 views

Hedging - calculating option prices using implied volatility surface

To hedge a strategy is it accurate "enough" to price an option using an implied vol curve vs moneyness (strike/spot) assuming sticky delta? The moneyness can be read off the chart, its corresponding ...