Friends who participate in options trading will have seen the volatility indicator on the market system. The volatility indicator is very important for option pricing. Similarly, we can also use volatility to predict changes in option prices and underlying prices. Let me introduce to you how volatility affects the value of options?
The main factors that affect the value of options: stock price, exercise price, expiration period, stock price volatility, risk-free interest rate, and dividends.
Stock market price: moves in the same direction as the value of the call option, while the value of the put option moves in the opposite direction
Risk-free interest rate: moves in the same direction as the call option value, and moves in the opposite direction to the put option value
Strike price: moves in the opposite direction to the value of the call option, and moves in the same direction as the value of the put option
Expected dividend: moves in the opposite direction to the value of the call option and moves in the same direction as the value of the put option
Expiration period: For American options, the longer the expiration period, the greater its value; for European options, a longer period may not increase the value of the option.
Stock price volatility: An increase in stock price volatility increases option value.
How does volatility affect the value of options?
Option volatility is one of the important factors that affects option value. Its impact on option value is mainly reflected in the following aspects:
1. Affect option prices . The higher the volatility, the higher the option price; the lower the volatility, the lower the option price.
2. Affect intrinsic value and time value . The higher the volatility, the higher the intrinsic value and time value; the lower the volatility, the lower the intrinsic value and time value.
3. Affect the profitability of option strategies . For buying options, the higher the volatility, the higher the profitability; the lower the volatility, the lower the profitability. For selling options, the higher the volatility, the lower the profitability; the lower the volatility, the higher the profitability.
The implied volatility derived from option prices can be used as a reference value for volatility in option pricing models. Implied volatility has characteristics such as volatility smile, volatility term structure, and mean reversion.
In other words, at-the-money options have the smallest implied volatility. The farther the strike price is from the underlying price, the greater the implied volatility of the option. Additionally, volatility fluctuates more as the expiration date approaches, but volatility fluctuates up and down around a certain mean.
Factors that affect stock option prices include underlying price, exercise price, holding period, risk-free interest rate, underlying dividends, underlying volatility, etc. Volatility is the parameter that has the greatest impact on option prices but is the most difficult to determine and cannot be directly determined. observed.
Volatility measures the uncertainty of underlying returns and has a positive effect on both call and put options. That is, the greater the volatility, the premiums for call and put options will increase accordingly.
According to the Black-Scholes model, investors can calculate the theoretical option price after determining the volatility and other parameters, and compare the theoretical value with the current option market price to determine the rationality of the market price. Therefore, whether the volatility set in the model is appropriate or not will directly affect investment decisions. So how should a reasonable volatility be set?
Volatility includes historical volatility and implied volatility.
Historical volatility is calculated using the standard deviation of the underlying price. Implied volatility is the volatility deduced by substituting the option price into the Black-Scholes model after determining other parameters. Compared with historical volatility, implied volatility represents the market price of options to a certain extent, so it is more practical to use implied volatility when pricing options.
This article comes from: Option Sauce