! ! ! Urgent Help Need ! ! ! ! ! ! ! !

Discussion in 'Options' started by tender_andy, Aug 7, 2003.

  1. in Option Station 2000i I faced to this problem:

    HOW they use Volatility of ASSET to calculate Theor.value of OPTION ??????

    The BS model uses the PRICE of Asset and not the VOLATILITY of asset ! ! ! ! !

    please help me ! ! !

  2. rickty


    OK, since you need an answer so urgently, I'll give it a try.

    The Black-Scholes option pricing model relies on both the price of the stock and its volatility. The volatility is expressed in terms of the standard deviation of returns.

    Check out the following for more information:


  3. Here is how linnsoft.com explains volatility .

    Historical Volatility reflects how far an instruments price has deviated from it's average price (mean) in the past. On a yearly basis, this number represents the one standard deviation % price change expected in the year ahead. In other words if a stock is trading at 100 and has a volatility of 0.20(20%) then there is a 68% probability(1 standard dev = 68% probability) that the price will be in the range 80 to 120 a year from now. Similarly there is a 95% probability that the price will be between 60 and 140 a year from now (2 standard deviations). The higher the volatility number the higher the volatility.

    If that is the case, how can you get option value from a stock vol value?
  4. Forget about it and take a few days off. If it's that
    !!!!!!!! URGENT !!!!!!!!! then it's probably not going to be a good thing anyway.
  5. You can see at the link you gave me that the BS doesn`t use VOLATILITY of Stock, just Stock PRICE!!

    For example let`s look into BS formula in OptionStation2000i:

    it has only THESE inputs:

    Price of asset;
    Strike of option;
    Volatility of option;
    Type of option;
    ExpirationDate of option


    So, my question AGAIN:

    How one can use asset volatility in calculating Theor.value of Option??
  6. Kap


    "Volatility of option" - u would only need thie is u were pricing an option on an option... the Vol of the underlying asset is used for pricing vanillas...
  7. So, Kap,

    one doesn`t need Asset volatility for pricing ordinary options, not exotic?
  8. Kap


    You need the volatility for the underlying asset to price the option. For something more exotic like an option2 on an option1, u would need to price option1 from the underlying asset in order to get the spot to price option2 and the Volatility of option1, but I wouldn't worry about the latter.

    You must have the underlying assets volatility to price any option using BS
  9. syd697


    Tender Andy,

    In order to find the theo. value of an option you need to input some kind of "volatility" number. This volatility number can either be the underlying asset's "historical volatility", or an "implied" or "future" volatility that you come up with. So you must either calculate the asset's volatility on your own, and plug that into the model, or come up with your own estimate of volatility (which could be based off the asset's volatility) and then plug it into the model.

    It seems to me that you are confused with the terms of "asset's volatility". There is not a total consensus on which type of volatility to use when finding the option's theo. value. Some like to use historical volatility, and other's (mostly floor traders) will use implied volatility. I've been a trader on and off the floor and I've used both.

    Bottom line, you need to input some form of volatility into the model to get a theo. value. If you don't put a volatility number in, the formula won't work (or you just won't get a valid result).

    Good luck