Modeling and Estimating Volatility of Options on Standard & Poor's 500 Index
21 Pages Posted: 1 Apr 2013
Date Written: February 1, 2013
Abstract
This paper explores the impact of volatility estimation methods on theoretical option values based upon the Black-Scholes-Merton (BSM) model. Volatility is the only input used in the BSM model that cannot be observed in the market or a priori determined in a contract. Thus, properly calculating volatility is crucial. Two approaches to estimate volatility are implied volatility and historical prices. Iterative techniques are applied, based on daily S&P index options. Additionally, using option data on S&P 500 Index listed on the Chicago Board of Options Exchange, historical volatility can be estimated.
Keywords: historical volatility; option premium; index options; Black-Scholes-Merton model; Chicago Board of Options Exchange
JEL Classification: C0, C01, C2, C58, D53, G0, G13, G17
Suggested Citation: Suggested Citation
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