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Topic: Volatility smile

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  Volatility Smile by OptionTradingpedia.com
Volatility smile is one of two curve shapes formed by charting the implied volatility of options across the various strike prices.
Volatility Smile is also sometimes known as the Volatility Sneer or the Volatility Smirk.
When the implied volatilities of a particular options contract returns a volatility smile when charted, it tells you that both in the money and out of the money options are in huge demand and would contain more extrinsic value than would an At The Money option.
www.optiontradingpedia.com /volatility_smile.htm   (867 words)

 Volatility Smile - Wikipedia, the free encyclopedia
An Implied Volatility Surface is a 3-D plot that combines Volatility Smile and Term Structure of Volatility into a consolidated view of all options for an underlier.
It is helpful to note that implied volatility is related to historic volatility, however the two are distinct.
At the same time, the historic volatility for IBM for the previous 21 day period might be 17% (all volatilities are expressed in annualized percentage moves).
en.wikipedia.org /wiki/Volatility_smile   (944 words)

 Implied volatility - Wikipedia, the free encyclopedia
Implied volatility also is inaccurate due to the fact that in the US and Europe, many listed options have a market place where there is a 2-sided market with a bid (where you can sell and a marketmaker can buy) and an offer or ask (where you can buy and a marketmaker can sell).
By computing the volatility for all strikes on a particular underlying we obtain the Volatility Smile.
The VIX is calculated using a weighted average of implied volatility of At-The-Money and Near-The-Money striked in options on the SandP 500 Index futures.
en.wikipedia.org /wiki/Implied_volatility   (454 words)

 IVolatility.com - Services & Tools -> Knowledge Base -> Education -> Understanding IVolatility.com data
The volatility smile shows that deep out-the-money and deep in-the-money options are priced by the market higher than theoretically forecasted by the formulas based on the lognormal distribution.
As a general rule, the lowest point of the volatility smile tends to correspond to the ATM strike, but this is not always the case.
Often, the shape of the volatility smile for options on shares or an index is called a "volatility smirk", because of its ascending line.
www.ivolatility.com /help/14.html   (778 words)

 Volatility Smile, Volatility Skew   (Site not responding. Last check: )
The pattern of implied volatilities forms a "smile" shape, which is called a volatility smile.
In practice, either the term "volatility smile" or "volatility skew" (or simply skew) may be used to refer to the general phenomena of volatilities varying by strike.
It indicates what is known as a volatility surface—a three-dimensional graph indicating implied volatilities by both strike and expiration.
www.riskglossary.com /articles/volatility_skew.htm   (1514 words)

 The Econophysics Blog: The Sardonic Smirk: The Volatility Smile and the Asymmetry of Risk
A volatility smile is the pattern formed when implied volatility (defined as the volatility necessary to make the Black-Scholes value of an option equal to the option's market value) is graphed relative to the strike price of the option (holding all other factors equal).
One of the most problematic is the so-called 'volatility skew' -- a volatility smile that is skewed towards one side.
The skewed volatility smile is sometimes called a 'volatility smirk' because it looks more like a sardonic smirk than a sincere smile.
econophysics.blogspot.com /2006/04/sardonic-smirk-volatility-smile-and.html   (823 words)

 Variance and Volatility Swaps
In this case, the implied volatility smile is interpolated and/or extrapolated to the relevant strikes, and there is a choice of interpolating method: linear, cubic spline or smoothed cubic spline.
The definition of the volatility swap is analogous to that of the variance swap.
It is often said that a volatility swap cannot be replicated in the same way as the variance swap, as the volatility swap is sensitive to the volatility of volatility.
www.fincad.net /support/developerFunc/mathref/VarianceSwaps.htm   (2429 words)

 Informal Probability Seminars - Michaelmas Term 2003
The goal of the talk is to review the various ways of addressing the volatility smile issue, from "local volatility" and stochastic volatility models to jump processes.
In this talk, we analyse implied volatility models defined by assuming that the per-delta short-dated smile is stochastic.
We solve this equation in particular cases and we obtain analytical expressions for the corresponding short-dated smile that generalises the formulae derived by P. Hagan when the volatility is lognormal and correlated with spot.
www.statslab.cam.ac.uk /Seminars/probability.html   (465 words)

 Derivatives Strategy - March'97: EstimatingVolatility
Volatility has undergone striking changes during the past several years in terms of how it is measured, predicted and used by traders and risk managers alike.
And, because volatility estimation as a risk management tool is a relatively young discipline, it is in this area that a great deal of original research is taking place, both in applying traditional trading techniques to risk and generating volatility models that work better within the context of Value-at-Risk and other risk-measurement models.
For example, if one were to plot the relative volatilities of options that were out of the money, at the money and in the money, all with the same underlying and maturity date, one will often find that both out-of-the-money and in-the-money volatilities are somewhat higher than at-the-money volatilities.
www.derivativesstrategy.com /magazine/archive/1997/0397fea2.asp   (1856 words)

 Volatility smile   (Site not responding. Last check: )
In economics a volatility smile is a common graphical shape that from plotting the strike price and implied of a group of options with the expiration date.
After what seemed to be one of rock 'n' roll's most viscous break-ups took place in early 1985 between frontman David Lee Roth and Van Halen, Dave emerged from the smoke in 1986 with a killer new band and one hell of a fun-in-the-sun, arena-rock album tha...
It took repeated listens, but I eventually decided that 'Whiplash Smile' was indeed (and remains) the best album Billy ever put out.It takes place approximately 3 years after the big boom of 'Rebel Yell', which was a monster album.
www.freeglossary.com /Volatility_smile   (416 words)

 Financial Engineering News - May/June 2004 - Upcoming Events Calendar (Page 16)
The implied volatility is more or less a catch-all term, capturing whatever variables are missing, as well as the possibility that the model is improperly specified or blatantly wrong.
But clearly the existence of multiple implied volatilities tells us that some options are more expensive than others, and the smile tells us that there is a pattern to the relative costs of these options.
If volatility is stochastic, researchers argue that the smile reflects the failure of the Black-Scholes model to capture the random nature of volatility.
www.fenews-digital.com /fenews/20040506/?pg=32   (1241 words)

 volatility - Hutchinson encyclopedia article about volatility   (Site not responding. Last check: )
An equity's volatility is normally related to the risk associated with the company, which in turn is related to such things as gearing, the type of business, and the size of the company.
The shares of small companies with high debt, operating in a new and unproven market, are likely to be highly volatile.
Our importance, our respectability in the world must be affected by the wild volatility, the assurance and disdain of all restraint which mark Lydia's character.
encyclopedia.farlex.com /volatility   (178 words)

 NillaHedge - VolatilityValueExplorer
If you are not already familiar with the volatility smile, it is a curve that results from plotting implied volatilities against strike price, with implied volatility increasing as the strike distances itself from the underlying stock price.
So, volatility risk intuition is potentially clouded by the volatility smile and our imperfect understanding of how to compare apples and oranges, e.g.
Such EWMA volatilities partially compensate for the mismatch between actual stock returns and lognormal models, and the testimonial is how extensively RiskMetrics’ approach is used by banks to model their portfolio risk and compute reserve requirements.
pnmx.com /Documentation/NillaHedge/NillaHedge_VolatilityValueExplorer.htm   (1493 words)

 Risk Latte - Volatility Today
The one year (implied) volatility at strike 1,000 is 15% and at strike 1,100 is 17%.
The smile implies that the implied volatility will vary with respect to strike (which can be approximated by the underlying) and due to this the value of the call itself will vary with the volatility; hence the product of two derivatives.
Even today, after almost two decades since the phenomenon of smile was first observed and with so much research, talk, training, practice and guidance from the top many junior traders fall victim to this problem when they first start trading.
www.risklatte.com /volatilityToday/volatilityToday070611.php   (609 words)

 Welcome to the Financial Trading System
The implied volatility smile refers to the graph of implied volatility against strike prices for options holding maturity, exercise style and type (put/call) constant.
The objective of this lesson is to learn how to calculate the implied volatility smile and then use it to estimate the price of nearby options.
In a subsequent module the calculation of a smile is automated for you but for now you need to learn where these numbers come from.
www.ftsnet.com /public/ftsmodhtm/ftsOpCalculator/ibm1.htm   (950 words)

 FPA Journal - Benefits of Protecting Investment Portfolios with Options:  A Historical Perspective
The practical implication of the volatility smile is that the “volatility premium,” or “time value”—that is, the premium in excess over the intrinsic value (immediate payout)—is “unfairly” high relative to the theoretical model for options with low strikes.
While the slope of the volatility skew may not appear very steep to an untrained eye, it will be make-or-break to the portfolio protection buyer.
The latter captures the volatility on the loss side and has been advocated in the literature as the best risk measure for investors who are concerned with losses rather than the classic definition capturing both down- and upside risks, especially when dealing with non-normal distributions.
www.fpanet.org /journal/articles/2008_Issues/jfp0208-art8.cfm   (4128 words)

 Volatility Smile   (Site not responding. Last check: )
After seeing a few blokes cop a beating last week due to volatility in the markets, we thought it would be a good time to investigate ways to profit...
As the smile of the cow holds tight on our faces, it seemed that I was...
They come to the rink everyday with a smile on their face, excited to take on another day, even when it's hard for us.
www.wikiverse.org /volatility-smile   (206 words)

 Jumps or Reflected Brownian Motion   (Site not responding. Last check: )
The “smile effect” is a result of an empirical observation of the options’ implied volatility with the same expiration date, across different exercise prices.
We tested two different hypothesis trying to verify the existence of two different phenomena: (1) the increase of the “smile” as maturity approaches; (2) and the association between the smile and the volatility of the underlying stock.
As maturity approaches the implied volatility of out-of-the-money options tends to be higher than the implied volatility of in-the-money options and, as the volatility of the underlying increases, the implied volatility of in-the-money options tends to be higher than implied volatility of out-of-the-money options.
pascal.iseg.utl.pt /~cemapre/2000/papers/duque.html   (298 words)

 Rethinking Implied Volatility
The well-known volatility smile or skew is at the center of much of this research.
The volatility smile notwithstanding, select 20 articles at random on implied volatility and I would be surprised if one of them argued that the Black-Scholes model is fundamentally incorrect.
The implied volatility is a catch-all that reflects anything important omitted from the model.
www.fenews.com /fen29/one_time_articles/chance_implied_vol.html   (2442 words)

 Implied Volatility Calculator by Peter Hoadley
Volatility cones are produced by the IV calculator combining historical volatility with implied volatility on the one chart.
Volatility can be easily varied to assess the impact of changed assumptions on valuations and on the relative attractiveness of the options in the chain.
The Implied Volatility Calculator can be used together with the historic volatility calculator to gain a much deeper understanding of the most critical factor affecting profitable options trading.
www.hoadley.net /options/develtoolsimpliedvolcalc.htm   (1315 words)

 Historical Volatility Calculator by Peter Hoadley
Volatility is calculated using the functions contained in the Options Excel add-in, using both un-weighted and weighted (EWMA, GARCH) volatility models.
Volatility cones can help determine whether current implied volatility (eg from the Implied Volatility Calculator) is high or low compared with historical volatility measured over the same periods.
This is called the volatility smile, or volatility skew, due to the fact that often deeply out of the money or deeply in the money options have significantly higher implied volatilities than options at the money.
www.hoadley.net /options/develtoolsvolcalc.htm   (892 words)

 Demystifying Volatility, Part 2 -- Implied Volatility
FAS 123R requires the volatility assumption to be the volatility expected over the life of the option.
Historical volatility can be a starting point for this assumption, but additional information may be needed to produce a reasonable assumption, in particular for companies with limited historical data or companies that expect future data to differ significantly from historical data.
Due to the varying implied volatilities across strike prices, options that are at-the-money should be used to calculate implied volatilities that are to be used in stock option valuation.
www.jpmorgan.com /cm/Satellite?c=JPM_Content_C&cid=1159308190641&pagename=JPM_redesign/JPM_Content_C/Generic_Detail_Page_Template   (1645 words)

 Tomas Bjork (Stockholm School of Economics): INTEREST RATE MODELS
For hedging purpose, these implied volatilities are used to calculate the "Delta" of the hedging portfolio, using different volatility values for options with different strikes and maturities.
We can think of implied volatility as an expected volatility average on the life of the option, by analogy with the average interest rate on a period.
As the forward spot rate, the local volatility (defined in the following equation) may be viewed as a forward volatility, meaning that is the anticipated level of the future spot volatility at expiration date if the underlying is equal to the exercise price.
www.math.hr /~ssmf/ssmf_abs.htm   (948 words)

 Dictionary definition of smile from Double-Tongued Word Wrester Dictionary
*2004 riskglossary.com “Volatility Skew”: The pattern of implied volatilities form a “smile” shape, which is called a volatility smile.
Most derivatives markets exhibit persistent patterns of volatilities varying by strike…In practice, either the term “volatility smile” or “volatility skew” (or simply skew) may be used to refer to the general phenomena of volatilities varying by strike.
Special attention is paid to the lending and borrowing of words between the various Englishes and other languages, even where a word is not a fully naturalized citizen in its new language.
www.doubletongued.org /index.php/dictionary/smile   (395 words)

 Options Pricing and Analysis, Implied Volatility ActiveX Software Component, C#, Visual Basic,.Net
Plotting the implied volatility against the strike price results in a curve that is termed the 'volatility smile'.
If the ratio of Call volatility to Put volatility is considered, a value greater than one may imply that the calls are priced higher than puts with a resulting upward price bias and vice versa, ie.
The analysis and interpretation of volatility skew should be undertaken with due care and diligence and is a matter for skilled, professional traders.
www.windale.com /optionsx.php3   (1222 words)

 Implied Volatility Smile Problem
He made an interesting point about some anomalies in the implied volatility smile that “should not” be included when making the calculations.
The option’s implied volatility will increase the further the out-of-the-money they are and the closer to expiration.
The other saying was “Volatility wise, dollar foolish!” He mentioned several market makers trading the skew and hedging delta neutral.
www.contingencyanalysis.com /archive/archive04-3/000000ec.htm   (372 words)

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