Implied volatility

Benzinga  Sep 28  Comment 
In previous articles in this series, (see What Is Premium?, Premium: How To Calculate And Understand It and Premium: Make It Or Pay It), premium has been defined as time value. Implied Volatility and expected movement have been explained in...
Benzinga  Sep 22  Comment 
There are numerous reports that come out monthly that give indication to the state of the economy in countries around the world. Many of them can be good opportunities for strategically planned trades. Two such reports that come out...
Benzinga  Jul 30  Comment 
According to Options and Volatility, shares of Sunedison Inc (NASDAQ: SUNE) saw unusually high options activity on Wednesday. Notably, the August monthly August 25 calls traded 10,869 contracts versus only 122 open interest. The August 24 puts...
Clusterstock  May 1  Comment 
By Saqib Iqbal Ahmed NEW YORK (Reuters) - Options traders appear poised for a big move in McDonald's Corp's shares as the world's biggest restaurant chain is set to unveil a much-awaited turnaround plan on Monday, and bullish bets have picked up...
The Economic Times  May 1  Comment 
The one-week sterling/dollar implied volatility, which expires on May 8 rose to 14.775 percent, its highest since the Scottish independence referendum.
Benzinga  Apr 30  Comment 
Speaking to Benzinga, TD Ameritrade Chief Strategist JJ Kinahan discussed the FireEye Inc (NASDAQ: FEYE) options market. Kinahan said that, based on implied volatility, the market expected an 8.25 percent move for FireEye, up or down,...
Financial Times  Apr 29  Comment 
Risk events such as Fed and BoJ meetings are not worrying markets
The Economic Times  Apr 28  Comment 
It was a period when implied volatility (IV) – or, traders’ perception of risk – rose 28.2% to 18.74. IVs rise when a market falls.
Benzinga  Feb 11  Comment 
Speaking to Benzinga, TD Ameritrade Chief Strategist JJ Kinahan said that implied volatility indicated the market expects Tesla Motors Inc (NASDAQ: TSLA) to make an 8.5 percent move (up or down) heading into its Q4 earnings report. Kinahan...
The Economic Times  Jan 9  Comment 
Decline of implied volatility by almost 150 bps of a day’s bounce back and mainly calls IV’s reducing are also not encouraging.


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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