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This is pretty straight forward: The market prices vanilla options via implied volatility. You can like it or not like it but that is the way it is. So, the fair price of the option is the equivalent of the implied vol via BS. Now, if you believe the true price of an option should be different from the traded market price and you figure out that you have ...


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It depends what you want volatility for. Theory will tell you that: "Implied variance of short maturity ATM options is approximately equal to the expectation of the realised integrated variance of the underlying over the life of the option and under the risk neutral measure" In math: $\sigma^2_{ATM}\approx E^Q\left(\frac{1}{T}\int_0^T\sigma^2_t dt\right)$ ...


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The main difference is that one approach assumes that a certain dynamical structure properly describes the underlying instrument, while the other approach is really only a re-writing of the price in terms of an implied volatility. Implied volatility Implied volatility really only needs two things: the underlying stock price and the call option price (apart ...



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