Implied Volatility
Youtube https://www.youtube.com/watch?v=FeEsaVzVcy0&ab_channel=PatrickBoyle
Workings and assumpion in the #BlackScholes formula Pricing Options using Black Scholes Merton https://www.youtube.com/watch?v=0leY0fVCVy8&ab_channel=PatrickBoyle)
µ expected return σ volatility of stock price Lognormal returns of stock prices are normally distributed
- Constant volatility. The most significant assumption is that volatility, is a constant over time.
- Efficient markets - The Black-Scholes model assumes stocks move in a random walk.
- No dividends.
- Interest rates constant and known.
- Lognormally distributed returns.
- No commissions and transaction costs.
- Liquidity - Markets are perfectly liquid.
Using the reverse Black Scholes formula to extract the volatility of an option contract.
Implied volatility is a fundamental concept in options trading and option pricing. Today we are investigating the calculation of implied volatility based on real-world option prices and two methods - a numerical Solver optimisation and a Newton-Raphson iterative procedure that makes use of option vega. Implied volatility explained: Solver and Newton-Raphson https://www.youtube.com/watch?v=j9DrTHazR0w&ab_channel=NEDL
Implied volatility approximation: Brenner and Subrahmanyan method https://www.youtube.com/watch?v=A1jIRrTAZ1o&ab_channel=NEDL
