it is chart of volatility..and the market today is not so turbulant... okey..i hear you...But before i will do this(buy the book's) I want to know what i has told incorrectly.....And write more simply as you can, please..
Yes, that's it. You are starting to get it. First you need to estimate the volatility to use in the pricing model. I'm not going to explain GARCH here as it is beyond this discussion, I suggest you Google it for more information. Once you have found the volatility estimate you are happy with, you use it in a pricing model to find the option's theoretical price. Then you can compare it to the market price of an option to see whether the option is over/underpriced relative to your estimate. Another way of looking at it is this. You can assume that all other traders use all the same parameters except volatility. So the only difference between your theoretical price and market price of an option is the volatility number that is used in a pricing model. As a result, implied volatility tells you what the other traders are collectively pricing the option at and your estimated volatility is what you think the option should be priced at. Then you just compare the two.
What a cluster-screw. You can't forecast volatility without calculating the standard deviation of historical volatility and plugging it into the B&S model. The difference in values of implied volatility from trader to trader despite which discounting interest rate used (or currency value in the Dollar/Euro pair per Merton) lay in which method used to arrive at the historical volatility: close-to-close or extreme; the latter of which uses every single value in the period forecasting to arrive at the mean. Since the close-to-close is easier to calculate it's most-often used. Though estimates almost always show an undervalued product when there really isn't one.
Sure you can forecast volatility without calculating historical volatility, what's stopping you from doing it? Where exactly does it say that forecast has to be based on historical data? By the way, based on your post, all those quant firms employ rocket scientists just so they can calculate historical volatility!? Gimme a break!
WTF are you on about? Without historical volatility plugged into the model what is it exactly do you think you're forecasting? You need a priori value to forecast a value with a range of present parameters. Simple. Moving on now.
WTF are you on about? You need an expected future volatility not historical volatility, and the way to get that expected future volatility doesn't have to be based on historical volatility! You can pick a number out of thing air and if that number happens to be consistently a better estimate of actual volatility then your historical volatility means sh*t. You can also assume that implied volatility is the best estimate of future volatility, which again means that you don't have to calculate historical volatility. On a side note, this discussion is going nowhere so I'm not gonna respond to your posts anymore.
i am really happy that you at last understood me... And the method to estimate the IV is GARCH, isnt it?
no, no, no ! you measure implied volatility by putting all the variables in an option model. The one thing you don't have is implied vol and that will come out of the model. Don't listen to the other asshole babling about the future vol. most market makers derived vol by feel, by supply and demand of options and by using common sense adjusting for special situations like possible takeovers etc. if they had to set their prices. It worked.
left out a part: 'most market makers derived vol by feel when I was trading at the option exchange'. Future vol that is ...