Implied volatility

The implied volatility is an actuarial measure of options and other derivative financial instruments with option component. They can be interpreted as a measure of the current expected market volatility of the underlying asset over the remaining term of the option.

Demarcation from the ( historical ) volatility

While the volatility (instantaneous standard deviation) is calculated from the historical price of the underlying, the implied volatility from current option prices determined. If the price of an option and the price-influencing factors maturity, price of the underlying, interest rates and the exercise price is known, can the implied volatility derived using an option pricing model from these variables.

The formula of Black-Scholes model and the other common option pricing models can not explicitly switch on the volatility. To calculate approximate numerical methods must be used. For European standard options that describes the Black- Scholes model, this lends itself to the Newton -Raphson method. It is very efficient and converges for typical desired accuracies within three or four iterations of this implied volatility.

Market behavior

In a rising stock prices typically fall, the implied volatilities and vice versa. The implied volatilities of " out of the money " - "in the money " call options are usually higher than the implied volatility of " in the money " call options (for put options the other way around ). If one plots the implied volatility on a y- axis and the exercise price of the option on the x- axis, then a graph is called the volatility smile.

Volatility Indices

The calculated by Deutsche Börse Volatility Indices VDAX and VDAX -NEW reflect the implied volatilities of default options on the DAX resist with remaining maturities of 45 or 30 days. For the Swiss stock market, there are volatility indices VSMI and VLEU, for the S & P 500, it is the VIX and the Dow Jones Euro Stoxx 50 is one of the VSTOXX.

Since the implied volatility in turbulent market phases is comparatively high, volatility indexes are often colloquially referred to as the " fear gauge ".

Launched in 1998 Volax futures on the implied volatility of DAX options " in the money " with three months residual maturity was discontinued later that year due to sharp decline in liquidity.