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As explained in the chapter 4.4 of I. Clark, you can estimate the weights by using the typical trading volumes. You can give more weight for dates with bigger trading volume which is logical.


you can use this algoithm to calibrate volatility (the use of vega deos not work for far OTM and ITM options): define vol1=0.0; define vol2=1.99; define z; define z2; for (i=0;i<max_iterations;i++) { z=0.5*(vol1+vol2); z2=z/(1.0-z); if (price>bs_price(z2)) { ...


I have heard the following argument- barring transaction fees, if my estimation of future realized vol is 30% and 1-month ATM implied vol is 20%, then I could potentially buy a 1-month ATM call/put and delta hedge it; as time passes and my vol estimate comes true I will make a profit. You are not guaranteed to make a profit even in this case since delta ...


You should always use the biggest volatility to minimise the risk and hedge the option correctly. Don't forget to multiply daily volatility by square(252) to annualize it.


I'll outline how you can estimate the (implied) real-world density function from (observed) option prices. Having found this real-world density, you can then compute all sorts of probabilities and quantify the market's expectation of future prices. Recall firstly that (European-style) options are priced as risk-neutral expectation of the discounted payoff. ...

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