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Why a Few Stock Prices Cannot Reliably Estimate Implied Volatility

Article Quant Q&A · Author: roller
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Summary

The document considers whether intraday option prices can be estimated from intraday stock prices and implied volatility observations from nearby days. The response proposes calculating returns from a short history of stock prices and annualizing their volatility as a rough estimate of implied volatility. This is a historical-volatility proxy, not a direct calculation of an option’s price; option valuation also requires contract terms and other inputs.

The evidence offered is a basic observation: a few daily prices yield only a small number of returns, while a longer history can give a more informative estimate of realized volatility. The response describes that estimate as a close approximation to implied volatility, but supplies no empirical comparison or pricing model. Implied volatility reflects option market prices and may differ from volatility inferred from underlying returns, so the suggested approach is limited and should not be treated as a reliable intraday IV forecast.

Key ideas

  • A short stock price history produces only a small sample of returns for estimating volatility.
  • Annualized historical volatility can serve as a rough proxy for implied volatility.
  • More observations may improve the volatility estimate, but do not guarantee an accurate implied volatility forecast.
  • Historical volatility alone does not determine an option price.

Tags

OptionsEquitiesVolatilityDerivatives pricing
Full text
# Predict option IV volatility when I have stock price and previous and next day price


# Predict option IV volatility when I have stock price and previous and next day price












If I have data for IV for the previous day the next da and the stock price in intraday format , can i calculate the option price in intrday format?

## Answer by Dom (score 1)

https://quant.stackexchange.com/a/55985

Given 3 days of stock prices, you could calculate two days of return and hence calculate the annualized historical volatility which would be the close estimate of the implied volatility. However, more data points would give a better picture of the true implied vol of this stock.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.