This talk investigates implied volatility in general classes of stock price models.
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The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks.Implied volatility is the estimated volatility, or gyrations, of a security's price and is most commonly used when pricing options.
In general, implied volatility increases while the market is bearish, when investors believe the asset's price will decline over time, and decreases when the market is bullish, when investors believe that the price will rise .
Oftentimes, options traders look for options with high levels of implied volatility to sell premium. This is a strategy many seasoned traders use because it captures decay. In general, it is not possible to give a closed form formula for implied volatility in terms of call price.
However, in some cases (large strike, low strike, short expiry, large expiry) it is possible to give an asymptotic expansion of implied volatility in terms of call price.
Generally speaking, traders look to buy an option when the implied volatility is low, and look to sell an option (or consider a spread strategy) when implied volatility is high. Implied volatility is determined mathematically by using current option prices and the Black-Scholes option pricing model.
Implied volatility is a dynamic figure that changes based on activity in the options marketplace. Usually, when implied volatility increases, the price of options will .
We analyze the properties of the implied volatility, the commonly used volatility estimator by direct option price inversion. It is found that the implied volatility is subject to a systematic bias in the presence of pricing errors, which makes it inconsistent to the underlying volatility.
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