Dotsis, George, Psychoyios, Dimitris & George Skiadopoulos (2006) Implied Volatility
Processes: Evidence from the Volatility Derivatives Markets, Working paper, Athens University of Economics and Business and University of Piraeus.
In this section, we focus on evaluating hedging effectiveness under more realistic market price models which account for implied volatility
We next use the VIX implied volatility
estimate (formed in period t - 1), noted [[?
To illustrate, figure 4 displays the implied volatility
of the NZD / USD exchange rate over the last four years, together with the spot exchange rate.
To see how a straddle is a bet on volatility, assume that the implied volatility
(using the BSM model) from a straddle on an equity option that expires in one month is 40 percent (annualized).
Using the expiration date of the lower intrinsic value option depends on the procedure used to compute implied volatility
, which is explained later in the paper.
Chart 2 shows movements in one-month and twelve-month implied volatility
respectively and in the krone exchange rate against the Deutsche mark.
Experienced option traders learn to rely on an option's implied volatility
, rather than its dollar price, as a better reflection of the option's price in the marketplace.
Mayhew and Stivers (2003) study the information content of implied volatility
about firm level volatility using options on 50 most highly traded stocks listed on CBOE during 1988-1995.
The average level of implied volatility
in over the counter shekel-dollar options declined by about 0.
And yet implied volatility
has rarely been lower, whether for equities, interest rates, currencies, or commodities.
Keywords: options, implied volatility
, informed trading, moneyness, volatility smirk.