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A short time later, the option is trading at $2.10 with the underlying at $43.34, yielding an implied volatility of 17.2%. Even though the option's price is higher at the second measurement, it is still considered cheaper based on volatility. The reason is that the underlying needed to hedge the call option can be sold for a higher price.
For markets where the graph is downward sloping, such as for equity options, the term "volatility skew" is often used. For other markets, such as FX options or equity index options, where the typical graph turns up at either end, the more familiar term "volatility smile" is used. For example, the implied volatility for upside (i.e. high strike ...
A long butterfly options strategy consists of the following options: Long 1 call with a strike price of (X − a) Short 2 calls with a strike price of X; Long 1 call with a strike price of (X + a) where X = the spot price (i.e. current market price of underlying) and a > 0. Using put–call parity a long butterfly can also be created as follows:
The options trader makes a profit of $200, or the $400 option value (100 shares * 1 contract * $4 value at expiration) minus the $200 premium paid for the call.
The formulas used above to convert returns or volatility measures from one time period to another assume a particular underlying model or process. These formulas are accurate extrapolations of a random walk, or Wiener process, whose steps have finite variance. However, more generally, for natural stochastic processes, the precise relationship ...
The buyer of the call option has the right, but not the obligation, to buy an agreed quantity of a particular commodity or financial instrument (the underlying) from the seller of the option at or before a certain time (the expiration date) for a certain price (the strike price). This effectively gives the buyer a long position in the given ...
The long position of the volatility option, like the vanilla option, has the right but not the obligation to trade the annualized realized volatility interchange with the short position at some agreed price (volatility strike) at some predetermined point in the future (expiry date). The payoff is commonly settled in cash by some notional amount.
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