Decoupled American Option Pricing Method: Computation of Implied Volatilities and Further Applications
22 Pages Posted: 2 Apr 2009 Last revised: 13 Jul 2009
Date Written: June 25, 2009
We introduce a method for volatility computation from listed prices of American options on an underlying close to log-normal. From prices of American calls and puts, traded at an exchange at multiple strikes we compute the underlying volatility and implied volatility of an untraded European contract at each strike.
Keywords: American option, implied volatility, strike dependence, smile, skew, Decoupled Volatility Model, Ju-Zhong Analytic Approximation, Underlying Volatility, European Put-Call Parity, Vanna-Volga correction
JEL Classification: C5, C6, G1
Suggested Citation: Suggested Citation