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Quantitative Finance · Glossary

What is Implied volatility?

Definition 25.3 Markets I: The Ecosystem and Exchange-Traded Markets · Chapter 25 — Volatility as a Traded Quantity: First Contact

The implied volatility of an option is the value of the volatility parameter which, put into the Black–Scholes formula with the option’s strike, expiry, forward and interest rate, gives the option’s market price. It is a change of units, from dollars to annualised standard deviation of returns, and asserts nothing about the model’s truth.

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