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Accuracy of Implied Volatility Approximations Using "Nearest-to-the-Money" Option Premiums

Author

Listed:
  • Isengildina-Massa, Olga
  • Curtis, Charles E., Jr.
  • Bridges, William
  • Nian, Minhuan

Abstract

Implied volatility is a useful bit of information for futures and options hedgers and speculators. However, extraction of implied volatility from Black-Scholes (BS) option pricing model requires a numeric search. Since 1988, there have been numerous simplifying modifications to the BS formula proposed and presented in the applied economics and finance literature to allow approximation of implied volatility directly. This study identifies and tests these simplification methods for accuracy for call only and put-call average elicitation of an implied volatility estimate. Results show that accuracy varies by method and whether call only or put-call average approaches are applied.

Suggested Citation

  • Isengildina-Massa, Olga & Curtis, Charles E., Jr. & Bridges, William & Nian, Minhuan, 2007. "Accuracy of Implied Volatility Approximations Using "Nearest-to-the-Money" Option Premiums," 2007 Annual Meeting, February 4-7, 2007, Mobile, Alabama 34927, Southern Agricultural Economics Association.
    • Handle: RePEc:ags:saeasm:34927
    DOI: 10.22004/ag.econ.34927
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    Cited by:

    1. Sukhomlin, Nikolay & Santana Jiménez, Lisette Josefina, 2010. "Problema de calibración de mercado y estructura implícita del modelo de bonos de Black-Cox = Market Calibration Problem and the Implied Structure of the Black-Cox Bond Model," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 10(1), pages 73-98, December.
    2. Noshaba Zulfiqar & Saqib Gulzar, 2021. "Implied volatility estimation of bitcoin options and the stylized facts of option pricing," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-30, December.
    3. Dan Stefanica & Radoš Radoičić, 2017. "An Explicit Implied Volatility Formula," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 20(07), pages 1-32, November.

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    Keywords

    Marketing;

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