You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
option pricing question
- Thread starter flyingforget
- Start date
Quote from MTE:
What value do you mean?
IV is calculated from market prices.
I mean option price,tradestation could calcualte the option price.
inputs:
MyAssetType( 1 ),
ExpMonth_MM( 0 ),
ExpYear_YYYY( 0 ),
StrikePr( 0 ),
Rate100( 0 ),
Yield100( 0 ),
ForeignRate100( 0 ),
Volty100( 0 ),
PutCall( Put ),
EuroAmer01( 0 ) ;
variable: ExpYear( 0 ) ;
ExpYear = ExpYear_YYYY - 1900;
Plot1( OptionPrice(
MyAssetType,
DaysToExpiration( ExpMonth_MM, ExpYear ),
StrikePr,
Close,
Rate100,
Yield100,
ForeignRate100,
Volty100,
PutCall,
EuroAmer01 ), "OptPrice" ) ;
Quote from flyingforget:
thank you MTE ,if the value caculated by the software does not equal to the real market price, then what causes the difference?
Based on the variables you list above, you seem to be calculating the Black-Scholes pricing for an option based on historical volatility. Implied volatility isn't a price (at least in any conventional sense).
In case you're interested, the following pages clarify the difference between historical volatility and implied volatility:
http://en.wikipedia.org/wiki/Volatility_(finance)
http://en.wikipedia.org/wiki/Implied_volatility
Quote from flyingforget:
I mean option price,tradestation could calcualte the option price.
inputs:
MyAssetType( 1 ),
ExpMonth_MM( 0 ),
ExpYear_YYYY( 0 ),
StrikePr( 0 ),
Rate100( 0 ),
Yield100( 0 ),
ForeignRate100( 0 ),
Volty100( 0 ),
PutCall( Put ),
EuroAmer01( 0 ) ;
variable: ExpYear( 0 ) ;
ExpYear = ExpYear_YYYY - 1900;
Plot1( OptionPrice(
MyAssetType,
DaysToExpiration( ExpMonth_MM, ExpYear ),
StrikePr,
Close,
Rate100,
Yield100,
ForeignRate100,
Volty100,
PutCall,
EuroAmer01 ), "OptPrice" ) ;
If the theoretical option price is different from the market price then the most likely difference is in the volatility you use as an input.
That's why you take the market option price and reverse the option pricing model to get the volatility that corresponds to this market price. This is the reason it is called the "implied" volatility, i.e. it is the volatility that is implied in market option prices.
Quote from jeb9999:
The options market makers input a volatility into their models to generate option bid/ask prices.
It is the rest of us that have to iterate option pricing models to determine the implied volatility.
This is not always the case. At our firm we work back into an implied volatility, pricing options on a weighted-vega basis according to the prices at which the at-the-money contracts have been most recently trading. When order flow is demand driven, we raise the value of the at the money straddle which in turn raises the implied vol of that month.
Quote from MTE:
If the theoretical option price is different from the market price then the most likely difference is in the volatility you use as an input.
That's why you take the market option price and reverse the option pricing model to get the volatility that corresponds to this market price. This is the reason it is called the "implied" volatility, i.e. it is the volatility that is implied in market option prices.
could I calculate the implied volatiltiy with tradestation?
does implied volatility have correlation with historical volatility?
any formula to calculate implied volatility with historical volatility?
any formula to calculate implied volatility with historical volatility?
No, IV is derived from the option price itself. IV is the option's market perception of future volatility not HV.
There is often a correlation between HV and IV but there are many exceptions, such as nearly the entire option market right now.
Looking at an extreme example. Many of us have traded biotechs.
A small biotech may have a relatively low HV, but now its one drug is up for FDA approval.
IV has increased, the option prices, relative to the stock price have increased dramatically.
The option market knows that there will be substantial future volatility, hence the spike in IV. It may be the front month options or some other month depending on the perception of the timing of the news release.
Often, these stocks trade virtually sideways until the announcement, yet the IV may increase daily.
When the announcement hits, the stocks moves up or down. IV will almost always collapse because the event is over, but the IV may or may not return to past HV correlation.
Yikes, back to trading.
There is often a correlation between HV and IV but there are many exceptions, such as nearly the entire option market right now.
Looking at an extreme example. Many of us have traded biotechs.
A small biotech may have a relatively low HV, but now its one drug is up for FDA approval.
IV has increased, the option prices, relative to the stock price have increased dramatically.
The option market knows that there will be substantial future volatility, hence the spike in IV. It may be the front month options or some other month depending on the perception of the timing of the news release.
Often, these stocks trade virtually sideways until the announcement, yet the IV may increase daily.
When the announcement hits, the stocks moves up or down. IV will almost always collapse because the event is over, but the IV may or may not return to past HV correlation.
Yikes, back to trading.