What is IV?

[zghorner]

To quote @destriero, "vol = synth time." Think about it this way: when you pay for insurance, the longer the term, the more you pay. Why? Because for every unit of time that passes, that insurance company is at a risk of you crashing. So, more time = more volatility. Same deal with you being short an option: the longer you write it for, the more volatility you're exposed to - and the greater the premium. Read up on the vol smirk (it's not a smile, because it's lopsided), and why it's on the put side... at least since 1987 or so. There's a number of other influences on price, and thus vol - which way the market sees trend/movement/uncertainty - so there's plenty of places to hunt for opportunity.

(I find this stuff fascinating, and can geek out about it for days. )

Just to reiterate (i know i am not on your level but it helps me learn to engage in conversation)...

 

[newwurldmn]

Bisection method...A blast from Numerical Analysis class in 1996ish.

So the professor was an Egyptian guy who was on sabbatical at Rice. He'd be explaining or deriving an equation, and one of us would ask for clarification. Typical response: "eeeeetz treeeveeeal" (it's trivial). I guess you had to be there

I got into Rice to study CS (but I would have been a year or two behind you). The signs pointed me in another direction however.

 

[BlueWaterSailor]

Just to reiterate (i know i am not on your level but it helps me learn to engage in conversation)...

Hah, by comparison to some of the folks here, I'm just recently hatched and still drying my feathers. So "my level"... yeah, anyway. Just reiterating this so I get it nailed down in my own head. But I do like Cottle quite a bit; reading him was a great help in understanding synthetics and practical conversion strategies. I also really like the above description.

 

[BlueWaterSailor]

Just for you

Check "Power Vega"

Vega/ sq root of time

Nice - thanks! I can't find anything about "power vega", but I can more-or-less visualize the surface. Seems a useful concept.

(Dammit, something's wrong with my Python/PySpark notebook server, or I'd go ahead and generate it. Would be nice to see how it behaves OTM/ATM/ITM. Oh well... I'll fiddle with it after RTH.)

 

[BlueWaterSailor]

Calculation of implied volatility of Black Scholes using method of bisections.

Don't mean to crab, but the Newtonian would converge faster.

EDIT: stolen from elsewhere, 'cause I'm too lazy to code it myself right now.

n = norm.pdf
N = norm.cdf

def bs_price(cp_flag,S,K,T,r,v,q=0.0):
    d1 = (log(S/K)+(r+v*v/2.)*T)/(v*sqrt(T))
    d2 = d1-v*sqrt(T)
    if cp_flag == 'c':
        price = S*exp(-q*T)*N(d1)-K*exp(-r*T)*N(d2)
    else:
        price = K*exp(-r*T)*N(-d2)-S*exp(-q*T)*N(-d1)
    return price

def bs_vega(cp_flag,S,K,T,r,v,q=0.0):
    d1 = (log(S/K)+(r+v*v/2.)*T)/(v*sqrt(T))
    return S * sqrt(T)*n(d1)

def find_vol(target_value, call_put, S, K, T, r):
    MAX_ITERATIONS = 100
    PRECISION = 1.0e-5

    sigma = 0.5
    for i in xrange(0, MAX_ITERATIONS):
        price = bs_price(call_put, S, K, T, r, sigma)
        vega = bs_vega(call_put, S, K, T, r, sigma)

        price = price
        diff = target_value - price  # our root

        print i, sigma, diff

        if (abs(diff) < PRECISION):
            return sigma
        sigma = sigma + diff/vega # f(x) / f'(x)

 

[zghorner]

Hah, by comparison to some of the folks here, I'm just recently hatched and still drying my feathers. So "my level"... yeah, anyway. Just reiterating this so I get it nailed down in my own head. But I do like Cottle quite a bit; reading him was a great help in understanding synthetics and practical conversion strategies. I also really like the above description.

Oh i hear ya man I have been reading through a bunch of old threads/journals lately and have seen your progress...I just know from current conversation that you are several steps ahead of me and showing you some respect for your efforts.

 

[BlueWaterSailor]

Oh i hear ya man I have been reading through a bunch of old threads/journals lately and have seen your progress...I just know from current conversation that you are several steps ahead of me and showing you some respect for your efforts.

Thanks, man - really appreciated! I'm rather proud of how far I've come in that time, truth to tell... definitely had help along the way - quite a bit of it from the folks here - for which I'm truly grateful.

 

[morganpbrown]

I got into Rice to study CS (but I would have been a year or two behind you). The signs pointed me in another direction however.

Great CS program. Heheh, it was cheap in those days. I transferred there from UC Davis in 1993, and the tuition at Rice ($6500) was cheaper than in-state tuition at UC Davis with a $2K scholarship! I think it's around $42K at present. Still "cheap" compared to others.

 

[newwurldmn]

Great CS program. Heheh, it was cheap in those days. I transferred there from UC Davis in 1993, and the tuition at Rice ($6500) was cheaper than in-state tuition at UC Davis with a $2K scholarship! I think it's around $42K at present. Still "cheap" compared to others.

i thought it was like 30k back in the mid nineties, like any other private school.

 

[morganpbrown]

i thought it was like 30k back in the mid nineties, like any other private school.

Ha, it was free until 1965! If memory serves tuition was $6500 in 1993 and went above $10K by the time I finished in 1997. With room & board if could have approached $30K.

Looks like it is now actually $51K, but was a "mere" $30K as recently as 2011 (https://www.collegetuitioncompare.com/trends/rice-university/cost-of-attendance/). Found a reddit post claiming $16K in 2000:

Their endowment was ~$2B when I was there. It's up to over $6B today (https://investments.rice.edu/about-us)! For a very small university. Don't get me started...