Hi guys.
I've been broking options for a few months now at a large IDB in the city. I'm technical minded and understand all the different strategies, positions, outcomes etc etc.
I know exactly what historical volatility is (annuallised standard deviation of the underlying as a percentage) and know how to work it out in excel. However one thing that i still dont quite understand is what implied volatility is as a number itself. I've asked many of my employees and most of them struggle to explain it and go red. I understand the jist of implied volatility but I think over complicating it.
For example say q3-14 on a commodity has a historical volatility of 20%. That's self explanatory. If a call with a strike of 27 has an implied volatility of 26% and the 30 call has an implied volatility of 30% (all of those numbers are completely made up and I understand skew) what does the 26% and the 30% actually mean. The options price for those strikes are suggesting historical volatility is expected to be 26% and 30% in the future if the underlying gets there? Or have I got that wrong?
Can somebody simply explain without going to into complex terminology/mathematics? I can work my off the shelf model like my colleagues but I'd actually like to know what the most important number in options means.
Thanks.
I've been broking options for a few months now at a large IDB in the city. I'm technical minded and understand all the different strategies, positions, outcomes etc etc.
I know exactly what historical volatility is (annuallised standard deviation of the underlying as a percentage) and know how to work it out in excel. However one thing that i still dont quite understand is what implied volatility is as a number itself. I've asked many of my employees and most of them struggle to explain it and go red. I understand the jist of implied volatility but I think over complicating it.
For example say q3-14 on a commodity has a historical volatility of 20%. That's self explanatory. If a call with a strike of 27 has an implied volatility of 26% and the 30 call has an implied volatility of 30% (all of those numbers are completely made up and I understand skew) what does the 26% and the 30% actually mean. The options price for those strikes are suggesting historical volatility is expected to be 26% and 30% in the future if the underlying gets there? Or have I got that wrong?
Can somebody simply explain without going to into complex terminology/mathematics? I can work my off the shelf model like my colleagues but I'd actually like to know what the most important number in options means.
Thanks.