Did you really think that the correct IV you can get from the model????
How i can to figure out the volatility?
- Thread starter jenek-cowboy
- Start date
how else are you going to get "implied" volatility, "implied" means the volatility coming from the option model.
You definitely have to read up on options: just by reading your questions I know you don't have enough knowledge about this. So there is stuff you don't understand, which will make it impossible to make money if these options are mispriced.
Implied volatility, historical volatility, future volatility ...
You definitely have to read up on options: just by reading your questions I know you don't have enough knowledge about this. So there is stuff you don't understand, which will make it impossible to make money if these options are mispriced.
Implied volatility, historical volatility, future volatility ...
No, not true! The parameter that the model uses is volatility and NOT implied volatility! As cvds16 mentioned, implied volatility means the volatility that is implied by market prices of options. In order to get that you need an option pricing model, which you then use along with market option prices to solve for volatility that is implied by the market.
It doesn't really matter which option pricing model you use to solve for volatility. The important bit is determining what will be the actual future volatility!
Heh....Okey...Lets start...
I want to buy a call-option...I must know the price of option..I use a BL-SH formula.For this i must to knew the IV , price, days to expiration and so on...And how I can get the IV????From the pricing model BL-SH???? Does you really trust that this is true????
thery interesting!!!! You mean that the parameter as volatility that i use in formula is not a IV?????IT is future volatility????it is not correct for me.. May be i realy not right
you do it the wrong way: you got to have an idea of future volatility first, then you put this in Black and Sholes formula so you get the price of the option. If the option on the exchange differs with the price you get (meaning it has an implied volatility different from your guess of future volatility), you can make money if you have low costs of trading and have the knowledge.
If however two options on the same stock have totally different implied volatity (this time you take the options and put them in the formula to get the vol of the options) there MIGHT be a possibility to profit, IF you know how to interpret Black and Sholes and IF those options are not totally different months.
If however two options on the same stock have totally different implied volatity (this time you take the options and put them in the formula to get the vol of the options) there MIGHT be a possibility to profit, IF you know how to interpret Black and Sholes and IF those options are not totally different months.
Quote from jenek-cowboy:
thery interesting!!!! You mean that the parameter as volatility that i use in formula is not a IV?????IT is future volatility????it is not correct for me.. May be i realy not right
You need to know the volatility to use in the pricing model such as Black-Scholes. The specific term implied volatility stands for volatility that you get by reversing a pricing model such as Black-Scholes when you input the market price of an option and then solve for volatility. Implied volatility is the volatility that the market prices into options.
Nobody knows future volatility, because it's the future! You use your estimate of what future volatility is likely to be to find the price of an option. Your future volatility estimate may be different to what the collective market's estimate is (this is the implied volatility). So if your estimate is different to implied volatility you will get a different option price.
In other words, the key question is:
Are you better at predicting future volatility than the market as a whole?
okey...But i really don't understand why i must put the IV to the model to get the theori price which i get from the same model????? I am assured that the calculeting the IV is a independent method...
Let's put it this way. The parameters that you need to input into an option pricing model are:
- price of underlying
- strike price
- time to expiry
- risk free interest rate
- dividends
- volatility
The volatility is the estimated future volatility.
Without the volatility parameter you cannot calculate the theoretical option price.
Now, all of the above 6 parameters are either fixed or easily observable with the exception of volatility. Volatility is the only parameter that is unknown and is not fixed.
So, the idea behind implied volatility is that you have the first 5 parameters and you can also observe the option price in the market. Hence, the only unknown that remains is the volatility. Therefore, you use the known 5 parameters and the market option price to find the volatility that equates to that option price. This is called implied volatility because it is the volatility that is implied in the market option price. That's it, this is where the implied volatility concept ends.
Estimating what the correct volatility number to put into a pricing model, i.e. estimating future volatility that you believe is correct, is a completely different matter. Some use statistical volatility (aka histrical volatility), others use past levels of implied volatility, yet others use some volatility modelling methods such as GARCH, and some use a combination of any of the above.
As a side note, you don't seem to understand the difference between implied volatility and a volatility number that you use in an option pricing model to find the theoretical option price.
I've tried my best to explain to you the concepts, but you seem to miss the point completely. I don't know, maybe is the language barrier!?