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

Abstract

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

Shkolnikov, Yuriy, Decoupled American Option Pricing Method: Computation of Implied Volatilities and Further Applications (June 25, 2009). Available at SSRN: https://ssrn.com/abstract=1371930 or http://dx.doi.org/10.2139/ssrn.1371930

Yuriy Shkolnikov (Contact Author)

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