Lecture 17.  Calculate the Annualized variance of the daily relative price change  Square root to arrive at standard deviation  Standard deviation.

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Presentation transcript:

Lecture 17

 Calculate the Annualized variance of the daily relative price change  Square root to arrive at standard deviation  Standard deviation is the volatility

 Develop Spreadsheet  Download data from internet

 All variables in the option price can be observed, other than volatility.  Even the price of the option can be observed in the secondary markets.  Volatility cannot be observed, it can only be calculated.  Given the market price of the option, the volatility can be “reverse engineered.”

Use Numa to calculate implied volatility. Example (same option) P = 41r = 10%PRICE = 2.67 EX = 40t = 30 days / 365v = ???? Implied volatility = 42.16%

 CBOE Example  Use Actual option ◦ Calculate historical volatility ◦ Calculate implied volatility

 Given a normal or lognormal distribution of returns, it is possible to calculate the probability of having an stock price above or below a target price.  Wouldn’t it be nice to know the probability of making a profit or the probability of being “in the money?”

Steps for Infinite Distribution of Outcomes

Example Example (same option) P = 41r = 10%v =.42 EX = 40t = 30 days / 365

Example (same option) P = 41r = 10%v =.42 EX = 40t = 30 days / 365 $ % 58% 63%

Example Price = 36Ex-Div in 60 $0.72 t = 90/365r = 10% P D = e -.10(.1644) = Put-Call Parity Amer D+ C + S - P s > Put > Se -rt - P s + C + D Euro Put = Se -rt - P s + C + D + CC

 Class discussion

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