Questions tagged [implied-volatility]

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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Implied Vol Smile: from Calls, Puts or Both?

This might be a simple question, but I couldn't find the answer anywhere: is there a separate Volatility smile (and surface) based on Calls and a separate Volatility smile (surface) based on Puts? Or ...
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1answer
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Black-Scholes Implied Volatility

I'm working my way through the following paper: Malz. A. M. (2014). A Simple and Reliable Way to Compute Option-Based Risk-Neutral Distributions I am completely stuck on the following derivation. The ...
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How to do Monte Carlo simulation given the stochastic ODE of a Brownian motion [closed]

I've learn the theoretical basis and lots of Brownian motion in quantitate finance. But i'm wondering how to actually simulate something based on brownian motion and make into something code-able or ...
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Dispersion Trading with a 2 component index

I have a dispersion question I need help with...An index SPY has only 2 components - AAPL and AMZN. We are given the implied volatility of SPY and AAPL as well as the correlation between the 2 assets. ...
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1answer
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Implied volatility of hypothetical options market

I am attempting to create a volatility surface for a US electricity market that has a liquid futures market but nearly non-existent options market (<5 trades per month across all strikes and ...
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2answers
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Calculating Implied Volatility from a put option

I am trying to find the Black-Scholes implied vol from a put option. I know how to do this in the case of a regular put option on an underlier $S(t)$ where $$ p(t, K) = e^{-r(T-t)}\mathbb{E}_Q\Big[ (K ...
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Short Maturity Implied Volatility in Heston Model

I am trying to compute Implied Volatilities from Heston OTM Call and OTM Put prices for short maturities ($\tau=$ 1 week). I am using the Carr & Madan representation, the little Heston trap ...
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R: How do i finish the tails in the risk neutral density, obtained from option prices

Im currently working on constructing the risk neutral probability distribution of a stock, based on the option prices. In doing so, i calculate the implied volatilities from the option prices, and ...
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Terminology : definition of skew for a volatility smile

Is there a generally accepted definition of skew for volatility smiles? Is skew always defined as $$ \frac{\partial{\widehat{\sigma}(K,T)}}{\partial{K}}, $$ where $\hat{\sigma}:[0;+\infty)\times[0;+\...
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Implied Volatility, annualized quantity ? And Total Implied volatility

so Implied Volatility is computed by equalizing the value of the call option given by the black and scholes model with the one observed. Then, by inversing $C_{BS}$, one gets "$\sigma_{IMP}$"...
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How are option values in real life calculated without volatility?

Implied volatility is the volatility that when inputted in the Black-Scholes model, it returns the theoretical market price of a European option value. I understand that implied volatility is not ...
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Probability of a stock price using implied volatility

I have attempted to use the fact of having implied volatility, but have not been able to come up with a viable way to calculate the probability, any ideas? Suppose that a stock $S_t$ follows a ...
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2answers
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What is the difference between parametric and non-parametric models?

I'm reading about volatility modelling and I came across the concept of parametric and non-parametric models. For example, GARCH is a parametric model and Realized Volatility is a non-parametric model....
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vix-like index for mid caps

Is there a vix-like index available for s&p 400 mid-cap instruments? i.e., implied vol based on s&p 400 put and call options? also, an iv for the s&p 600? thank you
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1answer
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Find the caplet volatilities for LIBOR fixings at each interval, given the ATM implied cap volatility term structure

anyone can provide solution or some idea to the following question? thanks
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1answer
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Bachelier Normal Implied Vol Python Script Jaekel Not computing?

Encountering issue with Python Script for computing Nomral Implied Volatility from (Bacherlier). Using industry standard method, Jaekel-> https://jaeckel.000webhostapp.com/ImpliedNormalVolatility.pdf ...
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1answer
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What is the use of implied volatility, the skewness and its surface? [closed]

I am leaning about options, saw various video lectures and read some literature including John C Hull. After a while I forgot where I started and where I am currently and I unable to connect dots. The ...
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What is the use of volatility surface and how do traders use it? [closed]

I was going through a use case where At time $t_{t}$, the price of a call option is $C1$ and the price of underlying stock is $S1$ At time $t_{t+1}$ day, the price of a call option is $C2$ and the ...
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1answer
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FX ATM-volatility quotes

Is the implied volatility ATM the same for a currency pair as for the inverted currency pair. I.e, can I expect the same volatility quote ATM for (for an instance) EURUSD as for USDEUR? And does this ...
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What does it mean to “calibrate vols”

As a beginner, it can sometimes be hard to discern what different terms and phrases mean in QF. I've heard multiple people such as academics and market-makers say things like "calibrate vols" or "...
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1answer
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Why would you have forsworn another \$1 and be disappointed, if you profited \$1 from your call option but its IV dropped from 55 to 30? [closed]

I can feel that I haven't savvied the punchline of this article by Mark Wolfinger BS Brooklyn College 1963, PhD Chemistry Northwestern 1968. How would've the \$50 call earned $\color{red}{\text{an ...
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1answer
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Why do Vertical Credit Spreads benefit from higher IV?

[A]s implied volatility increases, option premiums become more expensive. As implied volatility decreases, options become less expensive. Buying options when IV is 55 and selling when it is 30 is a ...
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1answer
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BS model without volatility

Maybe it is a naive question, I simply can't understand how the industry is using the BS model to price options, as the option pricing formula requires implied volatility as an input, which itself is ...
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Implied volatility surface modelling in filtered historical simulation

What is the best way to model implied volatility surface in filtered historical simulation (other than keeping it constant)? Is it appropriate to apply GARCH-like model to every point on the surface? ...
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1answer
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Why does Implied volatility fall when the options market shows an upward trend?

While reading How does implied volatility affect option pricing by Investopedia, it states the following in key takeaways When options markets experience a downtrend, implied volatility generally ...
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Question about Forward Price + Constant Interest Rate Approximations

Sorry if this is an obvious question, but I'm reading the following paper An Explicit Implied Volatility Formula, Dan Stefanica, Rados Radoicic, International Journal of Theoretical and Applied ...
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1answer
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Variance risk premium: When is realized vol higher than implied vol in practice?

I’m doing some work around the variance risk premium currently, and I’m interested in understanding the situations when realized volatility is > implied volatility in practice. I know in generally ...
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1answer
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Resources on VaR modelling for derivative portfolios?

I'm interested in finding resources related to historical VaR calculation for derivative portfolios where both spot and implied volatility changes are accounted for. The resources I've been able to ...
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Implied vol expansion for $\lambda$-SABR

Is anyone aware of a good implied volatility expansion formula for $\lambda$-SABR (SABR with mean reversion)? I am not sure if there is a formula as simple (or just slightly more complex) as the ...
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Is implied volatility model specific in the context of options on stocks and indices?

I just wanted to clarify a few things around implied volatility which I've read in the Hull/Natenberg books, which I find quite confusing. Both books refer to implied volatility in the context of a ...
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Looking for a math description of upside/downside implied vols - does Dupire help?

This is in continuation of this post which explained the meaning of the vols in the vol smile as follows: Suppose you have a downsloping vol smile. Then, the fact that the vol is higher on the ...
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Are statistical arb and relative value arb strategies implicitly short volatility?

I obviously don't want to generalise here, but my initial impression of stat arb and relative value arb is that these strategies earn stable pennies during bull markets when volatility is depressed ...
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Hedging vega risk with varswaps

I have encountered a statement that in summary reads like this: Varswaps became popular after the LTCM meltdown due to high levels of implied volatility the market was seeing at the time. Hedge funds ...
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1answer
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Implied vol and model calibration for an american option on a dividend paying stock - is there a market standard pricing model?

In terms of calibrating a pricing model to observed prices for American options on a dividend paying stock, is there a standard way of doing this in practice? My initial thought was to use CRR ...
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2answers
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Is there anywhere I can read the paper, “The Gamma-Vanna-Volga Cost Framework for Constructing Implied Volatility Curves”

Hello there was a paper published by: M. Arslan, G. Eid, J. El Khoury and J. Roth titled "The Gamma-Vanna-Volga Cost Framework for Constructing Implied Volatility Curves" (2009). I believe they ...
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VIX and Realised Volatility Scaling

I have calculated the VIX implied volatility according to the CBOE Whitepaper: \begin{equation*} \sigma^2 = \frac{2}{T} \left(\sum_i \frac{\Delta K_i}{K_i^2} Q(K_i) e^{rT} \right) - \frac{1}{T} \...
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Relationship between profit margins, historical volatility and implied volatility

In a scenario where no historic data exists in an option market, how would one come up with implied volatility for pricing of options, under the Black-Scholes-Merton model? My professor has ...
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Vega vs Gamma. Implied vs realized vol

I was reading the answers to this question: Long Gamma vs Vega , but I still I feel I am missing a bit of context. Let's say I am long an European call today. From the plots shown in the second ...
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How can I extrapolate a Smile curve of Maturity T for a longer maturity T+1>T

I have a interpolated vol smile curve for maturity 2 years and I would like to extrapolate it to a 5 years.
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Average daily move from implied volatility of risk reversal

I'm trying to understand an example in Euan Sinclair's Option Trading book. On page 239 he gives a risk slide and pnl from a long 30 delta put short 30 delta call position. He says the implied ...
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Calculating very near-term implied volatility

i re-calculated the implied vols feed by my broker (ThinkorSwim) and found that my near-term vols (expiries within the next 7 days or so) are much higher than the ones from ThinkorSwim. How can that ...
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1answer
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Implied volatility and greeks of options

When we are calculating deltas or vegas for different strikes should we use the underlying asset's volatility or should we use the implied volatility for the specific strikes at a fixed maturity? ...
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Are there any books/articles on how to use options to be long volatility (implied or realized)? [duplicate]

Given the market turmoil of late I have become fixated with this idea of using options to be long volatility (realised and implied). However, I dont know where to start, what to read, who to follow ...
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1answer
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When Fitting Implied Vol in, implied vol=ax²+bx+c, why is better to use moneyness than delta as independent variable?

I am trying to construct a smile curve using Option data, I can either interpolate implied vol vs delta or implied vol vs moneyness.
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Connecting the dots: Black Scholes, Volatility and Implied Volatility

I am a first year Management & Finance undergrad preparing for my second year Finance courses, given that term 3 and exams have pretty much been cancelled for all British first years. During that ...
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How are VIX futures being priced when the VIX itself is not being calculated because of circuit breakers

I see that CBOE has halted trading all SPX options, which means the VIX cannot be calculated. Yet VIX futures are still trading and we are very close to the last trade date for the March contract. I ...
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ATM volatility for FX options

I am quite familiar with equity implied volatility and smiles. However, I find it quite confusing and unclear when it comes to FX. I read many materials but could not get a grasp of the notion of ATM ...
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1answer
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Option Volatility Smile vs Delta

I am new to options trading and have been trying to better understand the relationship between implied volatility, delta, and moneyness. I was wondering how a call option's implied volatility can go ...
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Why SVI does not fit well short-maturity options?

As I understood, the SVI is widely used among practitioners. However, it is mentioned in many published papers (including ones written by Gatheral), that the SVI model does not fit well short-maturity ...
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For any twice differential continuous function C(T, K), does there exist a sigma(t, S) that can reproduce C(T, K)?

In the Dupire's paper, he assumes that there exits a function $\sigma(t,S)$ that can reproduce $C(T, K)$. My question is that: is the assumption true for any twice differential continuous function $C(...

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