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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1answer
234 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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2answers
872 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 ...
1
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1answer
186 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 ...
4
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2answers
581 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 ...
5
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3answers
220 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 ...
12
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4answers
8k 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. ...
2
votes
2answers
201 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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1answer
177 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 ...
2
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1answer
244 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 ...
1
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1answer
195 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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3answers
584 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
62 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 ...
4
votes
2answers
128 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 ...
3
votes
1answer
564 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 ...
4
votes
2answers
200 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. ...
1
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1answer
195 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 ...
4
votes
3answers
1k 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 ...
8
votes
2answers
2k 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 ...
4
votes
1answer
632 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 ...
0
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3answers
117 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 ...
8
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2answers
2k 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 ...
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2answers
73 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 ...
2
votes
1answer
710 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 ...
2
votes
2answers
490 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 ...
0
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1answer
284 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, $ ...
5
votes
1answer
119 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
104 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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0answers
58 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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0answers
71 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
209 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 ...
2
votes
2answers
205 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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vote
2answers
2k 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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3answers
1k 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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2answers
259 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 ...
4
votes
1answer
802 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 ...
0
votes
1answer
1k 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
votes
0answers
384 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 ...
8
votes
3answers
3k 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 ...
6
votes
3answers
1k 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 ...
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1answer
616 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 ...
4
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4answers
403 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 ...
2
votes
0answers
166 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 ...
0
votes
1answer
163 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!
1
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1answer
143 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 ...
2
votes
2answers
3k 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 ...
4
votes
2answers
428 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 ...
15
votes
5answers
11k 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?
4
votes
1answer
152 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 ...
5
votes
1answer
363 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 ...
0
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0answers
129 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?