Choosing Volatility Inputs for Options with Different Maturities

Summary

The document asks which volatility period to use when valuing two company options granted in different years but each with a three-year term. The answer recommends using the implied volatility surface at each option’s own time to maturity and strike, when market data for the company’s options are available. Because the options have different maturities, their relevant surface inputs may differ.

If suitable traded options are unavailable, the proposed fallback is realized volatility, estimated as a simple average or with exponential weighting. In that case, the response recommends applying the same volatility estimate and lookback period to both options as an approximation. It does not specify how to select the lookback window, address differences in market conditions between grant dates, or compare volatility estimates empirically, so the fallback is a practical suggestion rather than a fully defined procedure.

Key ideas

• Use implied volatility matched to each option’s time to maturity and strike when market data are available.
• Options with different maturities may require different points on the volatility surface.
• When suitable option data are unavailable, realized volatility can serve as an approximation.
• The proposed approximation applies the same realized volatility estimate and calculation period to both options.

Tags

# return volatility calculation with respect to different time period


# return volatility calculation with respect to different time period












in the BS model, if an option has 3 year expiration periods, and if the time of maturity of that option is calculated( periods between the grant period 2011-9-15 and exercise periods 2014-9-15 ), and another option granted by the same company very next year (2012)and can be exercised in (2015), then what would be the time period is used for these to option to the calculate the return volatility?

## Answer by alexprice (score 1)

https://quant.stackexchange.com/a/50500

In Black Scholes formula you would use implied volatility surface for given time-to maturity and strike for first option and second option respectively (check if you have this data on bloomberg or reuters)

If you don't have options available on the market for this company , then the approximation would be to use realized volatility (average, or exponentially weighted) , you should use the same vol (and same calculation period) for both cases then as it's only an approximation.

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