implied volatality
- Thread starter babu
- Start date
babu,
You might find the learning XLS helpful (4.b.8 implied vol) @
http://www.bionicturtle.com/premium/spreadsheet/4.b.8_implied_volatility/
Normally we think of solving for the call option given the inputs (risk factors), where volatility is a key input:
call option = BlackScholes[stock, strick, volatility,...]
implied vol is "reverse engineering" where (i) we have a traded market price and (ii) a OPM model, such that we find the volatility that returns a model price equal to the observed market price.
So in the XLS (screenshot below), you have to *iterate* or *goal-seek* to find it, but let's assume you *observe* the call option trades at $2.00 (see Call (c) = $2.0 in second column), then you goal seek or find the volatility that returns the $2 option price. In this case, 46% works. So, we say:
"the market price of $2 implies a volatility of 46%"
our concern is the volatility smile (or smirk, as my colleagues used to say!) that is assigned Chapter 18 Hull...this movie tutorial is next to be published!
Thanks, David
http://learn.bionicturtle.com/images/forum/4b8_implied_vol.png
You might find the learning XLS helpful (4.b.8 implied vol) @
http://www.bionicturtle.com/premium/spreadsheet/4.b.8_implied_volatility/
Normally we think of solving for the call option given the inputs (risk factors), where volatility is a key input:
call option = BlackScholes[stock, strick, volatility,...]
implied vol is "reverse engineering" where (i) we have a traded market price and (ii) a OPM model, such that we find the volatility that returns a model price equal to the observed market price.
So in the XLS (screenshot below), you have to *iterate* or *goal-seek* to find it, but let's assume you *observe* the call option trades at $2.00 (see Call (c) = $2.0 in second column), then you goal seek or find the volatility that returns the $2 option price. In this case, 46% works. So, we say:
"the market price of $2 implies a volatility of 46%"
our concern is the volatility smile (or smirk, as my colleagues used to say!) that is assigned Chapter 18 Hull...this movie tutorial is next to be published!
Thanks, David
http://learn.bionicturtle.com/images/forum/4b8_implied_vol.png
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