51 lines
1.8 KiB
Plaintext
51 lines
1.8 KiB
Plaintext
Chapter 37: How Volatility Affects Popular Strategies
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Stock Price:
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Strike Price:
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Time Remaining:
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Implied Volatility:
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Theoretical Call Value:
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100
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100
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1 month
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38.1%
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4.64
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759
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So, if implied volatility increases from 20% to 26% over the first month, then
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this call option would still be trading at the same price 4.64. That's not an unusual
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increase in implied volatility; increases of that magnitude, 20% to 26%, happen all
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the time. For it to then increase from 26% to 38% over the next month is probably
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less likely, but it is certainly not out of the question. There have been many times in
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the past when just such an increase has been possible - during any of the August,
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September, or October bear markets or mini-crashes, for example. Also, such an
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increase in implied volatility might occur if there were takeover rumors in this stock,
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or if the entire market became more volatile, as was the case in the latter half of the
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1990s.
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Perhaps this example was distorted by the fact that an implied volatility of 20%
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is a fairly low number to begin with. What would a similar example look like if one
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started out with a much higher implied volatility say, 80%?
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Example: Making the same assumptions as in the previous example, but now setting
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the implied volatility to a much higher level of 80%, the Black-Scholes model now
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says that the call would be worth a price of 16.45:
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Stock Price:
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Strike Price:
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Time Remaining:
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Implied Volatility:
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Theoretical Call Value:
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100
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100
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3 months
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80%
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16.45
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Again, one must ask the question: "If a month passes, what implied volatility
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would be necessary for the Black-Scholes model to yield a price of 16.45?" In this
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case, it turns out to be an implied volatility of just over 99%.
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Stock Price:
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Strike Price:
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Time Remaining:
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Implied Volatility:
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Theoretical Call Value:
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100
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100
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2 months
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99.4%
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16.45 |