Implied Volatility

What Is Implied Volatility?

Implied volatility, as its name suggests, is the volatility implied (contained or priced in) the price of an option. According to commonly used option pricing models (such as the Black-Scholes model), option prices depend on a number of factors, including among other things underlying price, time to expiration, and volatility. Other factors being equal, the higher implied volatility, the higher the price of the option.

The relationship between an option’s price and volatility is measured by vega, one of the so called option Greeks. Vega is the first derivative of an option’s price with respect to volatility.

Calculating Implied Volatility

Because the option pricing models are usually mathematically quite complicated (they reflect the fact that the exact relationship between volatility and option prices is also quite complicated), it is not possible to derive a direct formula for implied volatility from common option pricing models. However, you can get to implied volatility by trial and error, which is easy to do in Excel using the Goal Seek feature. The process is explained here: Calculating Implied Volatility in Excel

You can also calculate implied volatility (using Excel Goal Seek) comfortably in the Black-Scholes Calculator. Its PDF guide includes more detailed discussion about it, as well as about vega and the relationship between volatility and option prices. You can also use it to simulate how implied volatility, vega, or option price will behave under different scenarios (e.g. change with passing time or changing underlying price).


Related pages


13f-hrstock rsi meaninghow is vxx calculatedmsft share price historystraddle option strategy examplebull put spreaduses of skewnesscalculate formula excelblack scholes model explainedsec filings 13fkurtosis formulawhat is kurtosis and skewness in statisticscboe vix white papercalculate geometric mean in excelsortino ratio interpretationinverse vixadvantages and disadvantages of median in statisticsdefine bearishexcel function stdevnatural logarithm excelhow to calculate intrinsic value of a stock using excelannualization calculatorleveraged etnhow is vix calculateddelta for put optionbuying the vixoptions vixoptions straddle calculatorcanadian currency etfskewness and kurtosis in statisticsoption straddle calculatorblack schole equationspx options settlementcalculating median in excelvix dow jonestrend following trading rulesaapl historyintrinsic value vs market valuehow to calculate variance excelfeatures of derivative marketyahoo finance stock optionsoption spread calculatorthe greeks financerecent 13f filings13f formyahoo historical datapowershares etnwhat is a good sharpe ratiosharpe ratio formula excelhow to calculate standard deviation in exceldelta hedge examplemean mode median calculatorhow to calculate median in excelcoloured notepadetf etcvix inverse etf 2xnormsdist formulakurtosis skewhow to calculate stdev in excelsharpe ratio formula examplestraddle payoffblack scholes merton formulaoption greeks calculatorvar function in exceldefine sharpe ratiocovered call payoffgeometric average vs arithmetic averagecboevixwhat is the formula for dividend yieldform 13fgeometric average exceluvxy etfcboe quotenotepad color schemeoption stradleall etf liststraddle option strategyoptions futures and other derivatives solutions