Putting it all together – implied volatility modeling
In the options pricing methods we learned so far, a number of parameters are assumed to be constant: interest rates, strike prices, dividends, and volatility. Here, the parameter of interest is volatility. In quantitative research, the volatility ratio is used to forecast price trends.
To derive implied volatilities, we need to refer to Chapter 3, Nonlinearity in Finance where we discussed root-finding methods of nonlinear functions. We will use the bisection method of numerical procedures in our next example to create an implied volatility curve.
Implied volatilities of AAPL American put option
Let's consider the option data of the stock Apple (AAPL) gathered at the end of day on October 3, 2014, ...
Get Mastering Python for Finance now with the O’Reilly learning platform.
O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.
