Implied volatility

RECENT NEWS
The Economic Times  Dec 7  Comment 
The volatility index, which measures the implied volatility of Nifty options, fell to 11.95 on Friday. It hit a low of 11.56 on September 22.
Reuters  Dec 1  Comment 
The meeting of the Organization of the Petroleum Exporting Countries has come and gone, but the oil sector's volatility has stayed.
The Economic Times  Nov 24  Comment 
The one-week implied volatility rose to 4.025 per cent, Reuters data showed, with the options capturing the Nov. 30 vote.
The Economic Times  Sep 18  Comment 
The overnight sterling/dollar implied volatility rose to a high of 34.75% having closed on Wednesday at around 12.75%.
The Economic Times  Sep 17  Comment 
The overnight sterling/dollar implied volatility rose to a high of 18.60 per cent having closed Tuesday at around 9.4 per cent.
The Economic Times  Sep 11  Comment 
The one-week sterling/dollar implied volatility rose to a high of 11.725 per cent, according to Reuters data, its highest level since July 2013.
SeekingAlpha  Sep 10  Comment 
By Marc Chandler: This Great Graphic was created on Bloomberg. It shows the jump in the three-month implied volatility (white line). It bottomed in mid-July near 4.75%. (click to enlarge) By the end of August, it was testing 6.0%. Since the...
Forbes  Jun 6  Comment 
Where art thou volatility? Not here, nor there, but soon to revive, me thinks.  Volatility in risk markets is simply the measurement of variation in prices which is often calculated over certain time periods and against the idea of a normal...
FX Street  Jun 4  Comment 
Currencies Euro (EUR) implied volatility picked up, climbing above 15% overnight as markets price... For more information, read our latest forex news and reports.




 
TOP CONTRIBUTORS

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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