Option Volatility or Underlying?

[Seyfullah ÇETİN]

Hi,

 

This may not be a proper question but I have to learn.

 

When we are pricing an option, we are creating a Volatility Term Structure to pass to the BlackScholesMertonProcess to pass to the Pricing Engine. Let’s say we are creating a TermStructue with a constant volatility. Is this value that we provided the volatility of the underlying or the option itself?

 

Thanks in advance.

 

M. Seyfullah ÇETİN Yazılım Geliştirme Uzmanı

[hidden email] Tel : [phone] Faks : 0212 356 47 88

 

 

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[Luigi Ballabio]

Hi,

    I'm not sure what you mean by the volatility of the option or the underlying.  It's the sigma you would use in the Black-Scholes formula.  It's passed as a volatility term structure because it depends on both option strike and expiry.

Luigi

On Mon, Mar 18, 2013 at 9:34 AM, Seyfullah ÇETİN <[hidden email]> wrote:

Hi,

 

This may not be a proper question but I have to learn.

 

When we are pricing an option, we are creating a Volatility Term Structure to pass to the BlackScholesMertonProcess to pass to the Pricing Engine. Let’s say we are creating a TermStructue with a constant volatility. Is this value that we provided the volatility of the underlying or the option itself?

 

Thanks in advance.

 

M. Seyfullah ÇETİN Yazılım Geliştirme Uzmanı

[hidden email] Tel : [phone] Faks : 0212 356 47 88

 

 

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[Seyfullah ÇETİN]

Hi Luigi,

 

I just think that I got my answer. I was trying to say “does that represent the volatility of the price of the underlying or is it the volatility of the option price itself?“. I think it is the second one considering your reply.

 

Seyfullah.

 

From: Luigi Ballabio [mailto:[hidden email]]
Sent: Monday, March 18, 2013 4:19 PM
To: Seyfullah ÇETİN
Cc: QuantLib QuantLib
Subject: Re: [Quantlib-users] Option Volatility or Underlying?

 

Hi,

    I'm not sure what you mean by the volatility of the option or the underlying.  It's the sigma you would use in the Black-Scholes formula.  It's passed as a volatility term structure because it depends on both option strike and expiry.

Luigi

 

On Mon, Mar 18, 2013 at 9:34 AM, Seyfullah ÇETİN <[hidden email]> wrote:

Hi,

 

This may not be a proper question but I have to learn.

 

When we are pricing an option, we are creating a Volatility Term Structure to pass to the BlackScholesMertonProcess to pass to the Pricing Engine. Let’s say we are creating a TermStructue with a constant volatility. Is this value that we provided the volatility of the underlying or the option itself?

 

Thanks in advance.

 

M. Seyfullah ÇETİN Yazılım Geliştirme Uzmanı

[hidden email] Tel : [phone] Faks : 0212 356 47 88

 

 

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[Piotr Gregor]

no, you put there the volatility of the underlying's returns
if this is stock this is the square root of the quadratic variation of the stock's log price process
see here

cf16