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volatility priced into the options market on the NYSE

By: Mr. Diego Rebissoni (creator of www.leiod.com.ar)

then analyze the volatility expected by the options market in the area of \u200b\u200bthe NYSE, in the coming months. The mechanism used to determine this is to calculate implied volatility operated in the options market for different maturities of underlying assets through the valuation method Black & Scholes. It is already widely used and distributed in the world of financial derivatives.

This valuation method considers variables such as stock price, the exercise price, expected volatility of the underlying asset, expiration date, dividends and risk-free rate to calculate the price of the option. For our example, the methodology is to find what volatility of the stock price meets operated in the market and thus infer the volatility that trainers expect forward prices in the options market.

Among the ETF shares or elected, we have derivative actions with good liquidity and all evaluations were conducted for options "In the Money", without considering possible payment of dividends.

www.leiod.com.ar / files / SPY.gif

In the first analysis shows the historical volatility of the SPDR S & P 500 ETF (Symbol: SPY ETF representative of Standard & Poors 500) and implied volatility for the next 6 maturities.

The first chart shows the evolution of the volatility of the SPY calculated, considering the diversion of 20 wheels of closing prices. It is located to close to 75%, well above the historical average volatility of 2007.
In the second graph shows that the expected volatility for options transactions on the SPY, around 70% annually for the short term, in line with the current volatility. For dates of exercise greater than 100 days, the volatility drops sharply, reaching values \u200b\u200bclose to 43%.

Performing the same analysis for stocks, options, Citigroup Inc. (Symbol C) observed results different.

www.leiod.com.ar / files / c.gif

For the short term, the implied volatility is at the order of 140% for the next 3 deadlines (Nov-Dec-Jan) while historical volatility of the asset is close to 110%. According to the proposed technique in the short term, the options market expects higher volatility in the case of Citigroup. Increasing periods, the options reflect lower-than-expected volatility of short-term but three times the historical values \u200b\u200bof 2007.

In summary, evaluating the derivatives market, according to the technique of Black & Scholes, that volatility will remain on the current values \u200b\u200bfor the short term, falling for longer periods but standing at significantly higher values \u200b\u200bthan those experienced in the years before the current financial crisis. Released