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I understand that implied volatility is the expected volatility of an underlying contract in the Black option pricing model. This is easy to interpret for assets delivered at a point in time. But how about those delivered over a period of time, such as power? Is the IV the expected volatility of the monthly average price, for a monthly options contract, or of the daily price within that averaging timeframe?

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    $\begingroup$ Is this for OTC options of some kind or listed? If listed, what is the option? $\endgroup$
    – AKdemy
    Commented Oct 13, 2021 at 14:46
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    $\begingroup$ I have two examples: one is for a monthly power option (listed on ICE — ERCOT North Day Ahead 345kW) and the other is an OTC Nov-Dec steel call option (CRU forwards listed on CME as underlying). $\endgroup$
    – CasusBelli
    Commented Oct 13, 2021 at 15:43
  • $\begingroup$ I would also be careful with your comment "This is easy to interpret for assets delivered at a point in time". The IV has little to do with the expected volatility of the underlying because the real world does not follow the assumptions of the BS option pricing model (otherwise volatility smile wouldn't exist). IV is merely the goal seek such that the current price in the market of the option equals the price determined by the BS model. This parameter accounts for so much more than only the expected volatility. $\endgroup$ Commented Mar 14, 2022 at 15:05

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It depends on what you consider your underlying to be.

If you consider the underlying to be the thing which is being averaged, then you need to make sure that you're calculating the average price option on the underlying.

If you consider the underlying to be the "average price of the underlying over the relevant period" then you can just calc the implied vol of the option on this underlying.

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