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

standard deviation calculator in excelpayoff diagram call optionstrike price stock optionvix futures cboeblack scholes volatilitycalculate std deviationsma vs emaatr indicator explainedleptokurtic kurtosiskurtosis of normal distribution is 3 proofcomputing standard deviation in excelstandard deviation computational formulatheme notepad excel standard deviation formulaaapl historicalwhat is skewness in statisticscall option implied volatilitystock volatility calculatorcboe vix quotefutures rollover datescboe correlation indexhow to calculate a sample variancecomputational formula for variancevix uvxyjohn c hull solutionsvxx financecosting accounting formulasoption pricing calculator black scholesfinding waccmacd calculation excelblack scholes mertonfutures expiration calendarblacksholes modelvix futures trading hourslong straddle calculatorgeometric averagesintrinsic value of a call optionhow to interpret implied volatilitycboe comoption greek definitionsultra short etfmacd chartsdelta hedging options examplespot markets versus futures marketscollar option payoffinstrict valueweighted average cost inventory methodvix white paperscholes equationkurtosis and skewness normal distributionvix cboereturns calculator excelhow to interpret implied volatilityarithmetical averagemerton option pricing modelyahoo finance indicesfifo and weighted average methodgreek calculatorcboe vix calculationnatural log excelweighted average cost calculatoroptions on vixyahoo finance symbolscredit suisse tremont hedge fund indexintrinsic value stockscfe vix futuresskew calculationoversold overboughtfloat adjusted market capitalizationformula for calculating variance in excelunderlyingssum of square calculatorannualized daily returnvelocitysharessvxywhat does a negative kurtosis meaninverse vix etf 2xdefine squaring