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Talk:Implied volatility

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Above undated message substituted from Template:Dashboard.wikiedu.org assignmentbyPrimeBOT (talk) 00:20, 17 January 2022 (UTC)[reply]

I removed the discussion on Volatility Smile and redirected to a new page. In particular, the description contain errors, such as:

The implied volatility is typically significantly higher for in-the-money stock and interest-rate call options, i.e. call options with strikes lower than the current forward rate, than at-the-money options. Out-of-the-money call options on stocks and interest rates typically have a higher implied volatility than at-the-money. Plotting the graph of strike versus implied volatility therefore leads to a picture that looks something like a smile - hence the name of the phenomenon.

In fact, for stocks, it's all 'downside' (low-strike) options that have higher implied volatility while all 'upside' options have lower implied vol.

The nature of volatility smile (skew) and term structure of volatility is inter-related and I think it merits it's own page.

What is "the forward rate for 2 year into 1 year LIBOR"?--Jerryseinfeld 15:24, 1 Apr 2005 (UTC)

What is the "discount factor for value of money in two years time"? That here "is 0.9"? The value of money in two years is supposed to be 0.9 times todays value? 1.9 times todays value?--Jerryseinfeld 15:24, 1 Apr 2005 (UTC)

This seems to have been written to confuse. It doesn't explain how the data come together, it just hands you the numbers, then shows you the final step. It needs to show the whole process, not just the result. GeneralBorne (talk) 14:24, 15 August 2008 (UTC)[reply]

Doesnt this only apply to options? Any other type of financial instrument that has an implied volatility?--Sgcook 09:34, 10 January 2006 (UTC)[reply]

Yes, the only financial instruments whose value depends on the underlier's volatility are options, and thus only options can have an implied volatility. However many different types of instruments can have embedded optionality - for instance, an interest rate cap.

I think a better approach for this article would be to:

1. better motivate how to generate implied volatility from pricing models,
2. describe the inability to invert pricing models that causes the use of root-finding techniques,
3. discuss which root-finding techniques are used and why,
4. why quoting options on a volatility basis is a more useful measure of relative value than quoting on a price basis.

This is a fairly major rewrite I've got in mind. Any objections and/or comments, etc.? Ronnotel 14:31, 16 October 2006 (UTC)[reply]

Silence interpreted as consent. Changes have been made, please review, comment & revise as appropriate Ronnotel 16:03, 17 October 2006 (UTC)[reply]

The person who wrote this article has a gross misunderstanding of the relationship of the components of the BS model. It is GIVEN THAT OPTION PRICES ARE CORRECT, therefore, it is implied volatility that is the single unknown that is to be solved for.

This is indirectly supported by the comment: "Implied volatility is so important that options are often quoted in terms of volatility rather than price, particularly between professional traders."

These professional's are quoting implied volatility because THAT IS THE UNKNOWN. The option price is both known and accepted as being correct. 67.150.140.250 (talk) 04:05, 3 August 2010 (UTC)jimmyreno 2 august 2010[reply]

The statement "Implied volatility is useful for forecasting the market" needs to be supported by some evidence. I'm not saying it's wrong, but this assertion its own it doesn't help very much. Can you elaborate? Also, it doesn't belong in the example section - can you find another place to put this idea? Ronnotel 15:03, 23 February 2007 (UTC)[reply]

Behshour, I reverted your change because it's inaccurate to describe iv as belonging to the underlier. I understand what you're getting at - i.e. it's the volatility of the underlying asset's price, not the option. However, each of the multiple options written on an underlier can implied a different volatility, so saying that implied volatility is the volatility of an underlier seems odd. I think it's better to associate it with the option on whose price the iv is calculated. Ronnotel 03:23, 7 November 2007 (UTC)[reply]

Just popped in to remove the word "futures" with respect to how the VIX is derived. It is derived from SPX options, not SP or ES-- which are futures. —Preceding unsigned comment added by 173.21.129.111 (talk) 22:39, 7 January 2010 (UTC)[reply]