Implied Volatility

RECENT NEWS
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.
Benzinga  Jun 22  Comment 
Greeks are just a fancy name a math formula used to measure or explain a price movement. In the introduction to this series, it was explained how there are many Greeks mentioned in trading. This article will explain Vega in simple to understand,...
Financial Times  Apr 20  Comment 
A gauge of pound’s implied volatility has fallen, but analysts wary of calling shift in sentiment
Benzinga  Apr 11  Comment 
Numerous pricing reports for the UK economy come out on Tuesday, April 12, 2016, at 4:30 AM ET. There is a strategy however, that works well for these kinds of news events. Using Nadex spreads, one can enter the night before at 11:00 PM ET for...
Financial Times  Apr 7  Comment 
Implied volatility against the dollar pushed above 16% for the first time in 6 years
Financial Times  Feb 10  Comment 
Strong demand pushes implied volatility for WTI to the highest level since 2009




 
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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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