Calculating Strike Implied Volatility and Near-Expiry Spikes
Summary
The document distinguishes individual option strike implied volatility from the CBOE’s aggregate VIX calculation. It explains that a strike’s implied volatility is generally found by inverting an option pricing model, such as Black–Scholes–Merton, using an iterative numerical method. The VIX methodology is a separate calculation and does not determine each option’s individual implied volatility.
It also offers a possible explanation for calls and puts showing higher implied volatility even when their prices move in opposite directions: close to expiration, implied volatility can rise as time to expiry shrinks, including while an option’s price falls. The response suggests checking this behavior with an option pricing calculator. This is a concise explanation rather than a detailed derivation or empirical study; it does not establish that expiry is the cause in the specific data, and it notes that very short-dated options are often omitted from academic studies.
Key ideas
- Individual strike implied volatility is typically obtained by solving an option pricing model for volatility.
- The VIX calculation is distinct from calculating implied volatility for a single option strike.
- Near expiration, implied volatility may rise even as an option price declines.
- The proposed near-expiry explanation should be checked against the specific option data.
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# Answer by KaiSqDist (score 1) # Simultaneous increase in 'Individual Strike' implied volatility (IV) for both call and put options, despite one selling off and and the other rising? Would like to understand why is there a simultaneous increase in Individual Strike implied volatility (IV) for both call and put options, despite puts selling off and calls rising(refer attached options data from interactive brokers)? It would be simpler to breakup the question into 2 parts for better understanding. - How is Implied volatility calculated for individual strikes? In the paper published by CBOE a 'single' cumulative value for Iv is calculated based primarily on price of out of the money strikes and strike price,considering the other parameters like time to expiration , rate of interest etc remain same across strikes (link). So can the summed up individual values be considered as Implied Volatility's for Individual Strikes? 2.Why is there a simultaneous increase in implied volatility (IV) for both call and put options, despite puts selling off and calls rising? ## Answer by KaiSqDist (score 1) https://quant.stackexchange.com/a/82221 1. How is Implied volatility calculated for individual strikes? BSM implied volatility most likely (solve by iteration with Newton's algorithm for example). This has nothing to do with the VIX calculation. 2. Why is there a simultaneous increase in implied volatility (IV) for both call and put options, despite puts selling off and calls rising? When an option is about to expire ($\tau<7$ days), implied volatility tends to spike (due to low $\tau$) even though the price drops, which is also why they are commonly excluded in academic studies. You can try this yourself with the BSM IV calculator.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.