Implied Volatility

RECENT NEWS
Clusterstock  Jun 26  Comment 
We take another look at the high market valuations while also considering the extremely low levels of fear in the market as measured by the VIX. In the past David Bianco of Deutsche Bank has said if you look at the ratio of the S&P P/E to the VIX...
MarketWatch  Apr 11  Comment 
Investors aren’t exactly panicking, but a return of geopolitical risk is lifting haven assets like gold and Treasurys and boosting implied volatility.
MarketWatch  Feb 21  Comment 
Despite record levels in global stock markets and low levels of implied volatility, there is a lot of nervousness among investors and nowhere it is more apparent than in sovereign bond yield spreads
Benzinga  Oct 25  Comment 
Todd Gordon suggested on CNBC's Trading Nation that traders should consider a bullish options strategy in Alibaba Group Holding Ltd (NYSE: BABA) going into earnings. He explained that the stock has been trading sideways recently after a sharp...
The Economic Times  Sep 22  Comment 
With implied volatility, as measured by the VIX across countries, beginning to rise from multi-quarter lows, the price swings are expected to become large.
MarketWatch  Sep 9  Comment 
Implied volatility on Wall Street, as measured by the CBOE Volatility index on Friday, soared 30% to 16.35, the steepest increase since June 24, the day Britain voted to leave the European Union, in a referendum dubbed Brexit
Benzinga  Aug 22  Comment 
On the outside, a long straddle seems like a great option strategy. If you’re betting the stock is going higher while simultaneously betting the stock is going lower all you need the stock to do is move! How could you lose? As we’ve...
The Economic Times  Jun 23  Comment 
In the spot market, the pound was up 0.3 percent at $1.4752 after touching $1.4847, its highest level in 2016.




 
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Implied volatility is a measure of traders perceived risk in the underlying asset of an option.

Implied volatility is different from volatility, in the sense that implied volatility represents expectations about future fluctuations while volatility is observed by looking at past data.

Volatility expectations, or implied volatility, is deduced from option prices (both call and put) on an underlying security -- since these expectations are reflected in market prices of the option. Higher fluctuation expectations mean that the option has a greater probability of ending in the money, and thus the option commands a higher price and vice versa. By inputting the option price, along with other variables such as maturity, interest rate, strike price and underlying security price, in a pricing model (e.g. Black-Scholes) it is possible to derive an estimate of the investor's expectation of future volatility.

To derive a fair price for a particular option, the historical volatility is used. Often, though, the price that an option trades for on an exchange is different than the theoretical price, and the volatility that is used to derive the exchange price is referred to as implied volatility.

Implied volatility exhibits a skew since it is higher on options below the current price of the underlying security, than those above the current price of the underlying.

In practice, Implied Volatility is also the variable market makers play around with in order to make a higher profit on options that are suddenly in demand. This variability does not allow Black Scholes model to calculate implied volatility accurately.

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