In layman's terms, option implied volatility is the judgment of buyers and sellers in the options market on the magnitude of the price change of an option contract. If the volatility is high, it means that the price of the option contract will fluctuate greatly and the uncertainty will be high. On the contrary, low volatility means that the expected price fluctuation is small and the uncertainty is small. What does option implied volatility mean? The analysis of option implied volatility is introduced below. This article comes from: Option Sauce
1. What is option implied volatility?
Option implied volatility refers to the volatility contained in the premium in the market. It is calculated through the trial and error method by inputting the transaction price of an option contract and several other parameters into the option pricing model. It reflects the market's view of volatility. When implied volatility rises, it means that investors expect futures price fluctuations to expand, so premiums will also rise; otherwise, premiums will fall.
The calculation of implied volatility is very simple. Just analyze the real value and virtual value status of each option, the size of the trading volume, the duration of the option and other factors, and calculate the comprehensive implied volatility on a certain day. And the curve of the implied volatility index is obtained by connecting the dates to reflect the market conditions. The implied volatilities of call options and put options with different strike prices are different.
In actual trading, traders pay more attention to implied volatility. Implied volatility is affected by market buying and selling power and may not be the same as historical volatility. There is only one historical volatility for a given month's futures, but there are many implied volatilities. The implied volatilities of call options and put options with different strike prices are different. In actual trading, traders pay more attention to implied volatility.
Using the option pricing model to calculate the theoretical option price requires five parameters. The other four parameters can be easily obtained, and only the volatility is unknown. From this perspective, making options means making expected volatility. Historical volatility and implied volatility can be used to help traders predict future volatility.
2. Analysis of option implied volatility
Option implied volatility refers to the volatility implied by the premium in the market .
Implied volatility reflects the market’s expectations of future actual asset price volatility.
When market participants expect greater uncertainty in the future or the possibility of unexpected fluctuations, they are more likely to purchase options as a hedging tool, thus pushing up option prices, which is reflected in the rising implied volatility in the market. Conversely, if the market anticipates lower volatility, implied volatility may fall. Option implied volatility refers to the product that extracts the expectations for future volatility contained in market prices. It reflects the market's expected value of future actual asset price volatility and is an important reference indicator for investors in options trading.
Generally speaking, the higher the option implied volatility, the higher market participants’ expectations for future asset price volatility, and the option price will therefore rise accordingly. Conversely, if market participants anticipate lower volatility in future asset prices, then implied volatility will fall and option prices may also fall.
In options trading, implied volatility is calculated by analyzing and calculating factors such as historical volatility, risk-free interest rate, underlying asset price, exercise price, and expiration time. It can help investors evaluate whether option prices are reasonable and make more informed investment decisions.
3. How to calculate option volatility?
Implied volatility is the volatility deduced from the actual price and other parameters in the options market, so it needs to be calculated using an option pricing model. In option pricing models, implied volatility is an unknown parameter and therefore needs to be obtained through trial and error.
Commonly used option pricing models include the Black-Scholes model and the Binomial model.
1. Black-Scholes model
The Black-Scholes model is a model used to calculate European option prices. Its calculation formula is as follows:
C = S x N(d1) - K x exp(-r x T) x N(d2)
Among them, C is the option price, S is the underlying price, K is the exercise price, r is the risk-free interest rate, T is the option expiration time, and N(d1) and N(d2) are both normal distribution functions.
According to the Black-Scholes model, the implied volatility can be regarded as an unknown parameter, and the option price, underlying price, exercise price, risk-free interest rate, and option expiration time are used as known parameters, and the implied volatility can be calculated through a trial and error method. Volatility.
2. Binomial model
The Binomial model is a model used to calculate American option prices. Its calculation formula is as follows:
How to calculate option volatility?
C = S x p(u) - K x exp(-r x T) x p(d)
Among them, C is the option price, S is the underlying price, K is the exercise price, r is the risk-free interest rate, T is the option expiration time, p(u) and p(d) are the probabilities of the underlying price rising and falling respectively.
According to the Binomial model, the implied volatility can be regarded as an unknown parameter, and the option price, underlying price, exercise price, risk-free interest rate, option expiration time, and the probability of the underlying price rising and falling are known parameters. Wrong way to calculate implied volatility.
Option volatility is a very important parameter in options trading, and it is very important for option traders to know how to calculate option volatility.
Historical volatility is obtained by calculating historical price data and can be used to predict future fluctuations in underlying prices.
Implied volatility is the volatility deduced based on the actual price and other parameters in the options market. It is the most commonly used volatility in options trading and needs to be calculated using an option pricing model. Commonly used option pricing models include the Black-Scholes model and the Binomial model. By mastering how to calculate option volatility, you can better conduct options trading, reduce trading risks, and increase trading returns.