In option trading, we calculated volatility as historical volatility and implied volatility. Historical volatility is the price deviation in the past one year while implied volatility, on the other hand, is calculated using option price and implies stock volatility in the future. Implied volatility is crucial in option trading as it gives the future estimate of stock volatility. European call
option implied volatility can be calculated using EuropeanOptionImpliedVolatility()
, as shown in the following code. The first parameter is type of option, the second is call
or put
price, the third and fourth are current price of underlying and strike price of option, the fifth is dividend yield, and the sixth, seventh, and eighth parameters are risk-free rate of return, time to maturity in years, and initial guess for volatility:
>iv <-EuropeanOptionImpliedVolatility("call", 11.10, 100, 100, 0.01, 0.03, 0.5,0.4) > iv [1] 0.3805953
Similarly, implied volatility for the...