Who have answered the Q? Nobody hav. Not really.What is implied...

Who have answered the Q? Nobody hav. Not really.

What is implied volatility? It is the volatility implied by the price of the warrant.

Recall Warrants 101 (course offered at Cnossos TAFE by Miss Phaedra).

A warrant has a theoretical value.

That theoretical value = a calculation with one input the stock price, another input the time to expiry, another the stock volatility, and others (dividends expected before expiry, interest rate etc).

So you get Peter Hoadley's model up in Excel. You type in the inputs above and get an ANSWER called the theoretical value.

Now, suppose you change the volatility you gave as an input. The ANSWER will be a bit different. Keep changing the volatility you are putting into the model until the ANSWER (the theoretical value of the warrant) is EQUAL to the actual last traded price of the WARRANT.

The volatility that you put into the model to get exactly the last warrant price as the ANSWER is called the implied volatility.

See - that is what it is.

That must be in Chris Tate's book. You ought to read it.

Second, tougher Q for you option and warrant experts:
Give two uses for the implied volatility?


I'll give you a hint. Answer before you read it.



(1) You can compare the stock historical volatility described above by Mr Crashy_Option_Trader to the implied volatility on the warrant ask price and see if the warrant is cheap or dear.
(2) You can calculate the implied volatility on one series and use it as the input to price another series on the same stock.

cheers,
Expert_System_99

PS MR_CRASHY_OPTION_TRADER has got historical stock volatility wrong too.It is actually more like taking N closing prices and working out something like a standard deviation ... but a little different. Left as an exercise for the reader.