Term of the day: Implied volatility

The implied volatility of an asset is an estimate of volatility, or rate of price change, for the asset . In mathematical finance, volatility is defined as the annualized standard deviation of daily price changes. Thus, past volatility is known from historical data. Implied volatility can be interpreted as the market expectation of future volatility. The phrase implied volatility comes directly from how it is derived. Theoretical option pricing models, such as Black-Scholes, compute the price for an option on an asset from a small number of variables including volatility. Implied volatility results from treating volatility as the unknown, then using market price to solve for volatility. For a stock, the implied volatility would likely be computed from a weighted average of the implied volatility suggested by the prices of many different options on that stock. Implied volatility is normally denoted as σ, or sigma. In practice, implied volatility seldom matches historical volatility. Hedge funds can develop trading strategies based upon volatility that exploit this difference between historical volatility and implied volatility….

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About Eddhi Wahyudi H

Location: Jakarta, Indonesia Employer: Directorate Generale of Tax, Ministry of Finance Republic of Indonesia. Interest: Indonesian Property Tax System, Financial Management, Strategic Management
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One Response to Term of the day: Implied volatility

  1. roy says:

    jika market price lebih tinggi dari theoretical price, maka IV juga akan tinggi. apakah ini artinya trader harus pasang Put/call pada trading option? mohon petunjuk dan penjelasannya. dan pd saat market price lebih tinggi dari theoretical price artinya harga option tsb lebih mahal. kapan harus tunggu pd saat harga murah dengan keputusan utk buy put/call? terimakasih

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