Option Greeks
Module Units
- 1. Introduction To Greeks
- 2. Black Scholes Model
- 3. Introduction To Delta
- 4. Delta’s Relationship With Spot And Strike Price
- 5. Delta And Time To Expiry
- 6. Delta And Volatility
- 7. Delta Adds Up
- 8. Delta Hedging
- 9. Introduction To Gamma
- 10. Gamma’s Relationship With Spot And Strike Price
- 11. Gamma And Time To Expiry
- 12. Gamma And Volatility
- 13. Important Properties Of Gamma
- 14. Introduction To Theta
- 15. Theta’s Relationship With Spot And Strike Price
- 16. Theta And Time To Expiry
- 17. Theta And Volatility
- 18. Important Properties Of Theta
- 19. Rho
- 20. Introduction To Vega
- 21. Vega’s Relationship With Strike Price
- 22. Vega And Time To Expiry
- 23. Volatility
- 24. Volatility And Normal Distribution
- 25. Types Of Volatility
- 26. The VIX Index
- 27. Volatility Smile
- 28. Delta Neutral Hedging
- 29. Calendar Spread
- 30. Diagonal Spread With Calls
- 31. Diagonal Spread With Puts
- 32. Gamma Delta Neutral Option Strategy
- 33. Gamma Scalping
- 34. Put Call Parity
- 35. Options Arbitrage
- 36. Conversion-Reversal Arbitrage
- 37. Box Spread
- 38. Conclusion
Volatility Smile
Earlier, we learned the concept of implied volatility which is an estimate of future volatility. Now in this chapter, we will study a pattern of implied volatility (IV) known as 'Volatility Smile.'
Volatility smiles are IV patterns that develop while pricing options. When the IV of options (with the same expiration date, underlying asset, but different strike prices) is plotted, the graph has a tendency to show a smile.
Changes in volatility for options:
Volatility smile shows the more the option is in ITM or OTM, the greater the IV becomes. IV tends to be lowest for ATM options.
This smile is known as Volatility Skew. It is interesting that this pattern has existed only since the stock market crash of 1987. Prior to October 1987, implied volatilities were not much dependent on strike prices. This led to a conclusion that one reason for the equity volatility skew may be ‘crashophobia’. Since then traders are concerned about the possibility of a similar crash, they price the options accordingly.
'Volatility smile' is generally observed in near term equity options and forex options. However, index options and long term equity options tend to have a volatility skew.
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