Trade by Theoretical Pricing Model

Discussion in 'Options' started by WmWaster, May 5, 2006.

  1. rosy

    rosy

    the question was to estimate future near term volatility. you cannot only look at the ATM implieds.
     
    #11     May 7, 2006
  2. cnms2

    cnms2

    For a "normal" company under "normal" circumstances, the one year graph of the implied volatility is a pretty reliable scenario of how it will behave in the near future.
     
    #12     May 7, 2006
  3. cnms2

    cnms2

    "normal"

    <img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=1063542>
     
    #13     May 7, 2006
  4. cnms2

    cnms2

    not-"normal"

    <img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=1063543>
     
    #14     May 7, 2006
  5. Well, sure you can... as SLE has elaborated; the var-swap is simply a replication. You can use tea-leaves if that's your bag. Price a MSFT var-swap against the atm vols and you'll see the convergence. This works under the assumption that the distro of future vol is normal. Under a large vol of vol[skew analog -- strike vols reflecting a large vol or vol] and convexity-bias it becomes trickier, but convergence is still seen to atm vols, with a slight premium in index var-swap/atm implieds.
     
    #15     May 7, 2006