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
382 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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0answers
137 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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2answers
151 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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1answer
232 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 ...
2
votes
1answer
130 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 ...
2
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2answers
519 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 ...
2
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1answer
623 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
256 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 ...
4
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3answers
706 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
477 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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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 instance,...
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0answers
633 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?
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4answers
4k views

How to calculate the implied volatility using the binomial options pricing model

I want to calculate IV for american options with dividends. So far I have found algorithms to calculate the option price given a volatility. Please can you point me to paper or implementation (R, ...
4
votes
1answer
403 views

Volatility Return Distribution/Garch Modeling

For simplicity sake, if stock returns are normally distrusted, would that imply that second moment, variance/volatility, is chi-squared distrusted? If so wouldn't that imply the statistics(employed to ...
2
votes
1answer
771 views

Aprox intraday implied volatility using intraday option prices and EOD greeks

I have two options datasets: EOD IV and Greeks Tick option and underlying prices I'm looking to calculate IV for each tick. Is there a way to approximate the ticks' IV using last EOD Greeks and IV?...
3
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1answer
165 views

Different Exercise Style Options on Same Underlying

Some equities on European markets have options traded in two different exercise styles: American and European. Examples: ABB and ABB (european) on Eurex Banco Santander on MEFF Consider ...
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1answer
1k views

So many volatility models. Any comparisons of them?

Are there any papers that make an explicit contrast/comparison of the following (or other) vol models in terms of the suitability for addressing some empirical problem? Wavelet multiresolution ...
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0answers
66 views

Discount of Asian vs European vols

I understand the discount for Asian vs. European vol depends on time to expiry and length of averaging period. This makes sense intuitively; a short averaging period far away blurs into a single ...
5
votes
1answer
5k 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, ...
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0answers
468 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 ...
14
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4answers
29k 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 (...
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2answers
606 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: ...
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0answers
445 views

compute time from FX forward, how use DEPO rates?

assume I have following delta-term vol data from broker: ...
0
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1answer
235 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 ...
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1answer
205 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 ...
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1answer
152 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 ...
3
votes
4answers
6k views

Why is short term implied volatility typically higher?

Why do short term implieds move more than long term?
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5answers
12k 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?
3
votes
1answer
912 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
333 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 ...
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2answers
537 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
180 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 S&...
3
votes
1answer
511 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
368 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 ...
8
votes
3answers
3k 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
592 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 ...
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vote
1answer
908 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 ...
8
votes
2answers
3k 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 ...
9
votes
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 ...
5
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0answers
181 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
757 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
1k 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
659 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 model....
5
votes
1answer
488 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 ...
10
votes
1answer
328 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
1k 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
132 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
432 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
600 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 ...