In: Finance
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 |
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.