# Using Implied Volatility for Portfolio Optimization

Hello I am interested in portfolio optimization . Previously I when I have done portfolio optimization I would take the historical returns of a stock and use them to perform a mean variance optimization, however I was just recently introduced to the idea of using the implied volatility of options to perform a mean variance optimization because option implied volatility is forward looking unlike historical volatility . I would like to know if I were to use implied volatility to solve this problem how would I go about doing this . Would I take the for example one year of future volatility of different stocks and put that into a mean variance optimization instead of taking the historical returns of different assets and putting them into a mean variance optimization problem ?

1. Implied volatiliy, which depends on the strike of a vanilla option, is only a forward looking measure in the sense that it can be regarded as the risk-neutral expectation of break-even delta-hedging profit and loss of a vanilla option of strike $$K$$ which is delta hedged to expiration using a constant volatility. If this sounds complicated that's because it is. I suspect that many that use implied volatility as optimisation input use the ATM implied volaitlity as input. You could do that, but whether it's the logically right thing to do? I don't think so. Some would say using ATM implied volatility "is not even wrong".