Option Implied Volatility

Option implied volatility refers to the implied volatility of the price of an option in financial mathematics. The volatility is measured by the market price of an option based on several option pricing models. This option implied volatility theory lends a value for a particular option equal to the current market price of that particular option.

Option implied volatility – Definition

Option implied volatility is defined as a theoretical value representing a security’s volatility, which is the underlying asset to an option. This option implied volatility is determined by the price of the option. Many factors affect option implied volatility, such as the exercise price, the maturity date, the rate of return, and the price of the option. Option implied volatility appears in almost every option pricing model.

Option implied volatility – Historical volatility

The historical volatility of an option is often analyzed and compared with the option implied volatility, the main purpose being to determine whether or not options prices are undervalued or overvalued. By analyzing the historical volatility of an option, option implied volatility can be understood better to assess all types of risk valuations.

Option implied volatility – Implied volatility

Option implied volatility is the estimated volatility of a security’s price. To generalize, the implied volatility is increased in a bearish market, and declines in a bullish market. Most likely, in option implied volatility terms this is because bearish markets are viewed as more risky then bullish markets. Option implied volatility is often referred to as “vols.” Option implied volatility is used when calculating the premium of an option.

Option implied volatility – Calculators

One of the most used option implied volatility calculators is based on the black-scholes model. This option implied volatility calculator bases the information on the market price of an option and predicts future stock price volatility. This option implied volatility calculator includes the options Greeks, including delta, gamma, theta and vega.

Option implied volatility – Conclusions

Option implied volatility is a term used in financial mathematics to explain the pricing volatility of an option. This gives a value to the current market price of an option. Option implied volatility is often used in conjunction with another financial theory, historical volatility. Both are used in all risk evaluations. There are several calculators that can be used in calculating option implied volatility. These calculators are invaluable to a trader hoping to make wise decisions in trading and understanding option implied volatility.