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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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1answer
335 views

Daily Return to Approximate Annualized Realized Volatility 16 or 20?

Sometimes traders approximate realized volatility to compare it to the annualized implied volatilities in options by multiplying the 1-day daily return (as a substitute for the daily volatility since ...
5
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2answers
367 views

Why is the volatility smile so important

This might seem like a dumb question. When using a volatility model, stochastic for example, we try to calibrate it so that it fits the implied volatility smile given by the market, but why is this ...
3
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1answer
775 views

FX Option strikes from ATM, RR, BF quotes

I am trying to replicate the results in Consistent Pricing of FX Options, A. Castagna and F. Mercurio. However, when I calculate the strike prices for 25-delta put and call and ATM I cannot get the ...
2
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1answer
219 views

What is The Closed-Form Implied Volatility Estimator (As Defined by Hallerbach 2004) for A Put Option?

"An Improved Estimator For Black-Scholes-Merton Implied Volatility" by Hallerbach (2004) (link to article) provides an equation (Eq. 24, Page 13, and below) for the implied volatility of a call option....
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0answers
456 views

What is the formula for Intraday and overnight volatility?

I'm a noob trying to calculate IntraDay and Overnight Volatility. For Intraday volatility we can get the annualization factor with the following: Length (hours, Open to Close): 6.5 Time frames per ...
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1answer
58 views

Commodity options time to expiry conventions?

For CME's futures options, do most participants use a 365 day convention or a 252 day convention? I realize that it is our choice, but I'm interested in hearing from practitioners about what is ...
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0answers
311 views

Absolute or relative strikes?

World, When pricing a CMS Spread Option the market practice consider the strike as relative to ATM or Absolute? If I relate to the following paper page 70 the author refers to absolute strike [1] ...
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1answer
115 views

Why/When local volatility is preferred over implied distribution sampling?

Let's say we have an option whose payoff is path dependent (let's say it's asian option with observations every month). Then why these are usually priced with local vol instead of sampling from ...
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0answers
100 views

Adjusting implied vol for skew

I'm trying to evaluate fair volatility, but I am stuck on how to adjust the implied volatility for skew. When historic implied vol is calculated, obviously the strike used changes as the underlying ...
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0answers
112 views

Multi objective optimization Swaption/Caplets joint Calibration

People suppose that we have a two asset type portfolio optimization (as Intrument Type 1 and 2). In the each portfolio refered by the instrument type there are 2 asset so we have four asset in total. ...
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0answers
107 views

What is relation between option adjusted duration and volatility

I am calculating oasd using implied vol of 15%. What is relation between OASD vs Implied volatility in theory for various maturities. I am running using MMD curve. If anyone recommend any good ...
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2answers
864 views

Delta Hedging with fixed Implied Volatility to get rid of vega?

I'm wondering if i should use a floating IV or a fixed IV to delta hedge my options every day. I've read this post but would like different information : Delta Hedging with fixed Implied Volatility ...
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2answers
228 views

Does the correlation between stocks in an index affect the implied volatility of the index? [closed]

Does the correlation between stocks in a sector or between sectors in the S&P 500 have an impact, all else equal, on the S&P's implied volatility / the VIX? My guess is that the correlation ...
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1answer
399 views

Why is the ATM vol kind of an average volatility

In this question I asked about the mathematical rationale of using the ATM vol to price quanto options. One of the reasons pointed (as an answer) was, as expected, that the ATM volatility is kind of ...
7
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1answer
472 views

How can I compare 30 day implied volatility forecasts with GARCH forecasts?

I'm trying to understand whether there is a good way to compare forecasts for volatility from different sources i.e., implied volatility and GARCH. I'll outline a few statements that I believe and if ...
0
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1answer
287 views

Approximations for Quanto Options pricing

On page 4 of this paper, the auhor provides two good approximations for quanto options pricing: $V^d_{black}$ and $V^d_{blackATM}$. These approximations consist of using the ATM and/or stike ...
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1answer
62 views

Detailing a proposition about option pricing model coherence

On page 4 of this paper, the author states the following: "Looking at the limit case, when the strike tends towards 0, we should have the price of a forward contract and it should not depend on ...
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1answer
352 views

Where to get historical IV rank & IV percentile data?

I thought my broker (Interactive Brokers) was offering this but looks like what they actually supply is IV / with historical realized volatility. I also checked Quandl but as this is not data for ...
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0answers
616 views

Relationship between implied volatility of European and American put

Why is the implied volatility of an American put (on a non-dividend paying stock) lower than that of an European put on the same stock? For example suppose there is a put option that is priced at $1....
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0answers
100 views

Is it possible to calculate implied probability of >=X% return based on implied volatilities from options

My question is: Is it possible to imply either the upside or downside (one sided) probability from looking at implied volatilities of stock options? Let's take an example: say you had Stock A at $50, ...
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0answers
479 views

ATM-implied volatility

I am trying to understand the methodology that researchers used to compute ATM-implied volatility with real data. The problem is giving the discrete sets strike prices of one particular option with ...
5
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1answer
416 views

Proof of arbitrage-free implied volatility surface in relation to local volatility surfaces

I'm looking for proof of the following statement: "The existence of an arbitrage-free implied volatility surface is equivalent to the existence of a well-defined local volatility surface."
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2answers
462 views

Why is there greater demand for OTM and ITM options than for ATM options?

I´m currently writing a project on volatility trading and dynamics. The literature often states higher demand for OTM (out-of-the-money) and ITM (in-the-money) compared to ATM (at-the-money) options ...
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0answers
270 views

American Vs European Options behavior with fixed strikes and varying expiration

Following is from page 10 of Fengler (2005), "The prices of American calls for the same strikes must be nondecreasing, Merton (1973), and in the absence of dividends, this property translates to ...
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0answers
51 views

Is this the right formula to use implied volatility to gauge probability of a stock being within a certain range? [duplicate]

I read online somewhere, and I can't find it now, that to find the probability of a stock hitting a certain price within a certain time frame, we can use Implied Volatility: ...
4
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1answer
1k views

Implied Volatility Surface - log forward moneyness

I'm reading this paper by Fengler (2005) and have came across the below snippet. context: Implied volatiltiy surface plot has 3 dimensions IV, Strike, Time to Maturity. Author replaced Strike with ...
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1answer
453 views

Arbitrage free smoothing of implied volatility surface, by Fengler

I'm reading this paper link and have came across the below statement. Can someone shed some light on it. "The approach we propose here builds on smoothing rather than interpolation. Therefore, the ...
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0answers
178 views

Expected profit from straddle and its standard deviation

I was reading "Paul Wilmott introduces quantitative finance". In chapter 10 page 227 he states that: If you buy an at-the-money straddle close to expiry the profit you expect to make from this ...
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1answer
135 views

Implied volatility in parametric VaR

I'm calculating 1-day parametric VaR estimates for a stock index under the simple assumption that the returns are normally distributed. My question is, what is your opinion of using a volatility index ...
3
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3answers
184 views

Why is $dS/S$ an estimate of realized volatility?

For one period, $dS/S$ is an estimate of realized volatility, which we can annualize by dividing with $\sqrt{\Delta t}$. But.... why? How is $dS/S$ an estimate of volatility? Volatility is, to me, ...
5
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1answer
801 views

Continuous delta hedge formula

When we buy a call and continuously delta hedge using some implied volatility $\sigma_i$, what is the formula for our aggregate profit given that the actual realized volatility is $\sigma_r$? Say $...
3
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0answers
142 views

Relationship between Implied Volatility Curve Derivatives and the Underlying's Moments

Very probably this question has been posed before, so if someone can pose the link to the relevant question, it would be appreciated. What is the relationship between the implied volatility skew and ...
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1answer
103 views

How to estimate historical implied volatility?

I want to estimate the historical price of out of the money puts on equities. I do have about 10 years history of implied volatility (IV) but I would like more. I had the naïve idea modeling the IV ...
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0answers
197 views

Building implied binomial tree with American input options

i want to build an implied volatility binomial tree with American input options, so the setup is the following: 1) We know the market Price P of the American Put $P_{am}(t_i,K)$, where $t_i$ is the ...
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4answers
4k views

Why is realized volatility typically lower than implied volatility?

A number of quantitative finance textbooks mention something along the following lines, without further explanation: A typical feature of implied volatility from stock index options is that it is ...
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0answers
147 views

CDO Implied correlation: what for?

Reading about CDOs and calibration to find the implied correlation, I came up with the following question. Suppose we are pricing a CDO over a pool of $N=125$ names, using the usual Gaussian copula ...
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1answer
89 views

Should price impact be the same for positive/negative implied volatility shocks?

I am using a vendor system to stress a portfolio which contains (among others) derivatives with implied volatility exposure. The issue is that when using a 1000 bps implied volatility stress upwards ...
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2answers
478 views

Is the Implied Volatility Curve different under the Black-Scholes and Bachelier models?

Say we plot the implied volatility against strike price and moneyness for some options. As the implied volatility depends on the option pricing model it is reasonable to expect some differences here. ...
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1answer
111 views

Implied Volatility of a stock?

I know that implied volatility is the result of backing volatility out of any one of the many options pricing calculations. However, I've noticed that on ThinkorSwim and other platforms they also ...
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1answer
250 views

Confusion about CEV model

Under the CEV model the stock price has the following dynamics: $dS_t=\mu S_tdt+\sigma S_t^\gamma dW_t$, where $\sigma\geq0, $ $\gamma\geq0$. According to Wikipedia, if $\gamma <1$ the ...
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0answers
83 views

When realised vol is exactly equal to implied vol, why would profit still differ

I simulated a return series so that the realised vol is exactly equal to the implied vol being priced in. I then compared the profit made from holding a put position throughout the period against ...
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0answers
92 views

from local volatility function to implied volatility for a given strike

Assuming we know the local volatility function σ(S,t) for all S and t, how can we recover the corresponding implied volatility for a given strike K (and the other necessary parameters, S, r, T, t...)? ...
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2answers
465 views

Calculating implied vol using vanna volga

I'm trying to write an R script which takes in the 25d calls and puts along with ATM and creates a vol. smile. I've attempted to use the method put forward by Castagna and Mercurio to calculate the ...
2
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3answers
339 views

Seeking a model to Isolate a stock option's Implied Volatility related to a specific event

Note - These are my interpretations of options pricing and assumptions going into this question. Please feel free to comment on them or correct me if I am off. Option Implied Volatility varies based ...
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1answer
155 views

Question on implied vol (surface) and strikes

there have been loads of papers on skews ATM / OTM, volatility premium and such. Lots of explanations for why iv is different on same stock with different strikes focused on preference of informed ...
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3answers
1k views

Model to Predict the Change in IV of an Option

I am looking for a model that would allow me to predict the change in the Implied Volatility of an option based on a hypothetical change in the market. The goal is to create a better simulation of ...
6
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2answers
433 views

How to use a stochastic volatility model to price a quanto option

I want to price a quanto option using a Stochastic Volatility model (like Heston model, 1993). Normally, what we do is: Calibrate the stochastic volatility model, draw a binomial tree consistent ...
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2answers
941 views

What the implied distribution really is?

From volatility surfaces we have a implied distribution of $S_T$. This distribution is the real world distribution or this is a risk neutral distribution?
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2answers
2k views

Arbitrage Free Volatility Smile

When ATM implied volatility is higher than OTM put and call I believe that the volatility smile is no longer arbitrage free? Why is that? On the other hand, when ATM implied volatility is lower than ...
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0answers
99 views

IV surface quoted Skew/Curtosis/Putwing/CallWing

I came across a volatility surface quoted in unknown format to me. I have ATM Vol Skew Kurtosis PutWing and CallWing each for particular tenor. Any idea of what these represent/...