What Is Implied Volatility?
Implied volatility (IV) is a measure of the expected volatility of the underlying asset's price, as implied by the prices of its options. It is calculated using an option pricing model, such as the Black-Scholes model.
The process for calculating implied volatility for options can be broken down into the following steps:
Input the current stock price, strike price, time to expiration, risk-free interest rate, and option price into the option pricing model.
Solve for the volatility parameter in the option pricing model, which represents the volatility of the underlying asset's price.
The volatility parameter derived in step 2 is the implied volatility of the option.
It's important to note that there are different option pricing model available, Black-Scholes being one of the most popular. Additionally, implied volatility is not a direct observable, but is derived by using the option prices as inputs in a pricing model and solving for the volatility parameter. It can be used as a relative measure for options of the same underlying, or as a forward-looking estimate of volatility.
The process for calculating implied volatility for options can be broken down into the following steps:
Input the current stock price, strike price, time to expiration, risk-free interest rate, and option price into the option pricing model.
Solve for the volatility parameter in the option pricing model, which represents the volatility of the underlying asset's price.
The volatility parameter derived in step 2 is the implied volatility of the option.
It's important to note that there are different option pricing model available, Black-Scholes being one of the most popular. Additionally, implied volatility is not a direct observable, but is derived by using the option prices as inputs in a pricing model and solving for the volatility parameter. It can be used as a relative measure for options of the same underlying, or as a forward-looking estimate of volatility.
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