Question

In: Finance

why you did not find a single implied volatility for each stock and why your implied...

why you did not find a single implied volatility for each stock and why your implied volatilities were arrayed as they are?

MSFT

Strike

Option Price

Implied-Volatility

B-S Implied Volatility

175.

4.95

0.3279

0.132178

177.5

3.32

0.3157

0.124592

180.

2.04

0.3103

0.118525

182.5

1.13

0.3027

0.113638

185.

0.58

0.302

0.111275

Strike

Option Price

Implied-Volatility

B-S Implied Volatility

175.

1.32

0.3477

0.105137

177.5

2.2

0.3413

0.100382

180.

3.41

0.332

0.0930169

182.5

5.05

0.3452

0.0846884

185.

7.

0.3477

0.0560192

Solutions

Expert Solution

This is because implied volatility is not constant rather it is a function of strike price. There are various shapes of volatility such as volatility smile, voaltility skew etc. For a given expiration, deep in the money or out of the money options command higher prices (and thus implied volatilities) than what is suggested by standard option pricing models.

jeff jeffy answered 2 years ago
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