Tagged Questions

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.

learn more… | top users | synonyms

3
votes
1answer
2k views

When the Inverse Correlation between the SPX and VIX breaks down

As we all know the S&P and its implied vol, the VIX, generally move in opposite direction. To a large extent, the correlations makes sense. IV is one of the main drivers of the price of options, ...
1
vote
0answers
286 views

Interpolate option volatility in delta space in R

I have a bunch of deltas and option implied vols at those deltas. I would like to interpolate them in R. Interpolating them in delta space seems difficult, since normally you would like the ATM calls ...
7
votes
3answers
8k views

How to compute Implied Volatility Calculation?

We all know if you back out of the BS option pricing model you can derive and solve what the options is "implying" as its volatility. However, what is the formula used to derive Implied Volatility ...
0
votes
2answers
406 views

Why the implied volatilities calculated are so different

I Calculated facebook option(expired in 12/4/13) Implied Volatility with the Bisection Method. The program will be attached at the end. The results for different strike prices are so different: ...
4
votes
0answers
287 views

compute time from FX forward, how use DEPO rates?

assume I have following delta-term vol data from broker: ...
0
votes
1answer
180 views

volatility Table and BS formula

assume I have implied FX volatility Delta-Term table from broker. I have time noticed as 2M, 3M. what do I have to put into BS formula, is it 2/12 or "count the business days"/"daycount basis"? I am ...
0
votes
1answer
166 views

Numerical difficulties in fitting option prices

In [1], the authors state that "Although some studies apply the curve-fitting method directly to option prices, the severely nonlinear relationship between option price and strike price often leads to ...
0
votes
1answer
107 views

Volatility Index Weighting Scheme

Among the several weighting schemes used for constructing volatility indices, which ones are the best for forecasting (realized) volatility? I've constructed a volatility index for emerging markets ...
2
votes
4answers
2k views

Why is short term implied volatility typically higher?

Why do short term implieds move more than long term?
11
votes
5answers
6k views

How do you explain the volatility smile in the Black-Scholes framework?

Does anyone have an explanation for the currently naturally forming volatility smile (and the variations) in the market?
2
votes
1answer
548 views

Implied Volatility for Asian option

I am new to the topic of Asian options. Assume I want to price an Asian put (fixed strike, discrete average) in the Black Scholes world. I know implementations to calculate the value but what is the ...
4
votes
3answers
240 views

self-consistent parametric form for equity implied volatility

I recall reading a paper, but can't remember where I found it. In short, there was a parametric form for volatility smile/skew that fit both index and single stock vol slices and had intuitive ...
1
vote
2answers
395 views

What is the instantaneous P&L of a Variance Swap?

What is the instantaneous P&L of a variance swap. Is it $(\sigma^{2}_{t}-\sigma^{2}_{implied})dt$?
4
votes
2answers
173 views

Indexes/stocks with flat implied volatilities

After the 1987 crash, the S&P500 index implied volatility changed from nearly flat to negatively sloped. According to Rubinstein the Black-Scholes model was not so wrong when applied to the ...
3
votes
1answer
439 views

Interpreting QuantLlib implied volatility numbers

I am using QuantLib to calculate implied volatilities. I am trying to understand the calculated figures (especially, when compared to historical volatility). The calculated implied volatility numbers ...
6
votes
3answers
335 views

What is an acceptable error on implied volatility?

Given an implied volatility surface (on equity indexes) and a calibrated model, what is the range of error on implied volatility a trader would accept ? This obviously depends on the model used to ...
6
votes
3answers
2k views

What really drives option implied volatility?

A common and oft repeated belief regarding options volatility is that implied volatility increases due to people bidding up a contract, usually related to anticipation of the outcome of an expected ...
3
votes
1answer
398 views

Why does Skew measure remain more-or-less constant for Listed Expiries?

I have looked at the Variance Swap Papers published by GS-VarSwap and JPM-VarSWap where they talk about approximation to VarSwap strike using ATMF vol and Skew (slope of the volatility skew for 90-110 ...
1
vote
1answer
692 views

What precision do I need to calculate implied volatility?

I'm developing a software to calculate the implied volatility of an option using the Black & Scholes formula and a trial-and-error method. The implied volatility values I get are correct, but I ...
5
votes
2answers
2k views

Implied Volatility from American options (binomial)

I am trying to get the implied volatility from options on commodity futures and I know it's possible to get it from the binomial american options (on an non-dividend paying stock). I believe it is ...
7
votes
2answers
1k views

How to calculate the most realistic historical option prices with additional publicly available parameters

This is a follow up question of this one. My aim is to create the most realistic historical option prices possible with publicly available data. I want to do this for backtesting purposes. The ...
3
votes
0answers
170 views

How companies choose earnings release dates, & effect on Implied Volatility

A company's earnings release date significantly affects weekly or monthly option prices/implied volatility. For companies that typically release earnings on the cusp of monthly options expiration, ...
5
votes
2answers
1k views

Constructing an approximation of the S&P 500 volatility smile with publicly available data

Besides of the VIX there is another vol datum publicly available for the S&P 500: the SKEW. Do you know a procedure with which one can extrapolate other implied vols of the S&P 500 smile with ...
5
votes
1answer
458 views

Modified bisection formula for deriving implied volatility for a dividend paying american option

I am trying to work out the formula for calculating the implied volatility of an american option on a stock paying dividends (discrete payments or annualized yield). On page 171 of Haug The ...
3
votes
2answers
832 views

How to calculate COMPOSITE underlying implied volatility from ATM (near month) option prices?

I am trying to calculate the implied volatility of an underlying given observed prices of call and puts. There are two scenarios: The ATM strike is pinned by the market (i.e. underlying level == ...
4
votes
2answers
557 views

SKEW and VIX relations?

My question is about the CBOE published index VIX and SKEW. To start with, I consider working on the variance dynamics. I calibrate the market data (such as VIX and VIX futures) into the Heston ...
4
votes
1answer
399 views

What's the connection between implied vol curve of SPX and SPY?

I think there should be an obvious connection of the two implied vol curves from the SPX and SPY markets since the underlying of SPX is SP500, while the underlying of SPY is a ETF which tracks sp500 ...
9
votes
1answer
307 views

What drives changes in implied volatility on ETFs/ETNs?

I thought implied volatility, as well as the VIX, primarily increase due to increases in the underlying asset's volatility, as well as the options themselves being bid up because more people were ...
0
votes
1answer
933 views

what is the best way to calculate the probability of an equity option ending in the money?

Given historical implied volatility and all other know variables (stock price, option strike price, option expiration date, dividend rate, interest rate) what is the best way to calculate the ...
3
votes
0answers
123 views

What is the relation between return volatility and return rank volatility, and how can I control the latter?

I have no experience in finance, but I've been playing around with a virtual portfolio. I'm trying to control the "rank volatility" distribution - that is, the volatility of a stock's daily rank in ...
0
votes
1answer
285 views

Does an option's price “ratio” with the underlying security price?

I'm trying to understand option pricing better. Let's say security ABC is \$40, and a 38 PUT option with 40% implied volatility (and 90 days till expiration) is priced at X. If security ABC then ...
6
votes
1answer
399 views

How sensitive are vertical spreads to changes in implied volatility?

How sensitive are vertical spreads to changes in volatility / implied volatility in the money, at the money, and out of the money? I'm thinking for 1 point spreads this would be very small / neutral ...
7
votes
2answers
1k views

What does the VIX formula measure and how does it work?

I have read the CBOE's white paper on the VIX and a lot of other things, but I need to honestly say, I don't really get it, or I am missing something important. In semi-layman's terms, is the VIX ...
8
votes
1answer
403 views

Option Portfolio Risk - Volatility/Skew - practical implementation

I'm trying to improve my methods for calculating real-time US Equity option portfolio risk. My main problem is volatility "stability" across all strikes in an option series. The current ...
6
votes
2answers
2k views

How to extrapolate implied volatility for out of the money options?

Estimation of model-free implied volatility is highly dependent upon the extrapolation procedure for non-traded options at extreme out-of-the-money points. Jiang and Tian (2007) propose that the ...
0
votes
0answers
123 views

Getting the actual distribution of a stock price at time T using implied volatility [duplicate]

Possible Duplicate: How to derive the implied probability distribution from B-S volatilities? Let's assume a stock price S, with volatility $\sigma$ constant, no dividend, and risk free ...
9
votes
1answer
532 views

Can VIX be interpreted as a proxy for instantaneous volatility?

BJO06 (Table 2) estimate the following Cox-Ingersoll-Ross model for market variance, $\sigma^2_t$: $\mathrm{d}\sigma^2_t = (\alpha_0 + \alpha_1\sigma^2_t)\mathrm{d}t + ...
5
votes
1answer
964 views

Can anyone give me a practical example of pricing and calculating IV on equity index options? (i.e. using real market data)

I have been trading (mostly equity and equity index) options for a while now and I want to apply a slightly more quantitative approach to my trading - specifically, by calculating IV and incorporating ...
4
votes
1answer
820 views

If VIX is the Implied Volatility of SPX, 30 days in the future, how many days into the future does VIX vol look?

Question: if VIX is the Implied Volatility of SPX, 30 days in the future, how many days into the future does VIX vol look? +60 or +30? Lets see if I'm on the right track: Premise 1: VIX is the ...
11
votes
2answers
4k views

How to derive the implied probability distribution from B-S volatilities?

The general problem I have is visualization of the implied distribution of returns of a currency pair. I usually use QQplots for historical returns, so for example versus the normal distribution: ...
8
votes
5answers
1k views

What functional form describes the implied volatility curve?

It is often convenient to parametrize the implied volatility curve to allow easy interpolation of volatility for any strike or maturity. What functional form describes the implied volatility curve for ...
3
votes
0answers
143 views

Could the Implied Volatility distribution change again? [closed]

It is well documented that following the stock market crash in 1987 the prices of options started to demonstrate skew and smile in the distribution of implied volatilities. This feature has been ...
8
votes
3answers
5k views

How should I calculate the implied volatility of an American option in a real-time production environment?

There are many models available for calculating the implied volatility of an American option. The most popular method, employed by OptionMetrics and others, is probably the Cox-Ross-Rubinstein model. ...
3
votes
1answer
181 views

Is it possible to estimate the correlation between an equity and its IV, purely from its IV skew?

If we know the options Implied Volatility (IV) skew for an equity, is it possible to calculate the probability of the equity moving, given a move in the IV? We can define IV skew as the difference ...
11
votes
1answer
2k views

How do I compare implied and historic volatility?

what would you suggest are the starting points for comparing, in an easy, visual way, implied and delivered volatility surfaces? I'd like to see what the differences are between the historic surfaces, ...
6
votes
3answers
831 views

Lib for Arbitrage-Free Smoothing of Implied Volatility Surface?

I'm looking for an implementation of Arbitrage-Free Smoothing of the Implied Volatility Surface - Matthias R. Fengler. Does anyone know of any existing libraries that have implemented this paper? Any ...
5
votes
2answers
883 views

Recommendation for a library to calculate the local volatility surface?

I'd like a library to calculate the options local volatility surface, i.e. the options implied volatility surface for a collection of strikes and their bid/ask prices. Here are the libraries I've ...
6
votes
3answers
356 views

Parameters for pricing option on EDF

Ladies and Gents, Im writing a quick routine to calculate implied vols for options on EUR$ futures with Bloomberg data. My question concerns the part where I have all my inputs and am ready to pass ...
3
votes
0answers
184 views

What is the longest number of consecutive days that options implied volatility has stayed “extremely high” for any particular underlying?

Curious as to whether or not there is any sort of all time record. Any index, future, or stock will do. Volatility must be well above the average 1 year volatility for all periods.
9
votes
5answers
5k views

What is the implied volatility skew?

I often hear people talking about the skew of the volatility surface, model, etc... but it appears to me that a clear standard definition is not unanimously in place among practitioners. So here is ...