The Volatility Smile and Skew

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Күн бұрын

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In this video we will look at the volatility smile and discuss the implied volatility shape coming from options on the same underlying asset, that have the same maturity date, but have different strike prices.
We will see that before October 1987 market crash the volatility curve was actually flat. Market participants started to price after the crash that the geometric Brownian motion assumption for the dynamic of stock prices was not true, stocks can jump and their distributions are fat-tailed.
0:00 Introduction
0:19 The Volatility is assumed Constant in Black-Scholes Model...
0:42 ... This is Not True in Practice
1:33 S&P Implied Volatility Before and After 1987 Market Crash
1:45 S&P Daily Returns Are Fat-Tailed
2:30 The Volatility Smile...
3:36 ...and Skew
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Пікірлер: 5

@gonegirl-xs1el Ай бұрын

Very well explained! thank you

@quantnext4773 Ай бұрын

Thanks for the feedback!

@geonwilliams 2 ай бұрын

Great video, thanks. Can you explain how at 0:56 you are showing put and call options on the same chart? Is it OTM puts on the left of spot and OTM calls on the right? In which case, how are ITM options represented? Sorry if I'm being dense.

@quantnext4773 2 ай бұрын

Thanks for the feedback. We used here implied volatility for call prices. This being said, the volatility implied by a put price will be very similar than the volatility implied by a call price with same expiry and strike price.