How to calculate Implied Volatility by hand?

martys · Aug 12, 2005

Hi All,

I got a dumb question (not exactly a math person). I know I can get the in-the-money call and put implied volatility on the IVolatility.com website. My question is how do I calculate it by hand to get the same numbers? Thank you for all your help.

Regards,
William

Moreagr · Aug 12, 2005

use the black scholes model.... that will give you the IV results

Moreagr · Aug 12, 2005

they have IV calculators on the net its a financial derivative.

gummy · Aug 13, 2005

You can check out this stuff on Implied Volatility.

martys · Aug 13, 2005

Thanks Moreagr and gummy.

Hi Peter,

I found your site while researching on Bollinger Band... a great great site. Thank you for the spreadsheet!

Too bad my math brain took the worse turn after high school or college... I plan to reverse the process as my son grows up... hope it's not too late

Regards,
William

sle · Aug 13, 2005

At the money, you can approximate it as

Implied Vol = P / (0.4 F Sqrt(t) )

where P is price of option, F is forward price (for short dated stuff it's ok to use spot price), t is time to expiry in years.

martys · Aug 13, 2005

Quote from sle:

At the money, you can approximate it as

Implied Vol = P / (0.4 F Sqrt(t) )

where P is price of option, F is forward price (for short dated stuff it's ok to use spot price), t is time to expiry in years.

How far off in percentage is this approximation? Thanks.
Sorry can you explain exactly what is F?

riskarb · Aug 13, 2005

To solve for price:

0.4*F*vol*sqrt(T)*qty

martys · Aug 13, 2005

For options on futures, F is the current price of the futures contract, is that correct??? Thanks.

sle · Aug 13, 2005

Quote from martys:
For options on futures, F is the current price of the futures contract, is that correct??? Thanks.

It's the forward price, which is spot price times (1 + risk free rate). Now, you should remember that this approximation would be a bit off because of discounting and the fact that this is a first order approximation. In general, it' would be off by less then half of BS vol, though, so it's a reasonable way to check.