Options and Volatilities

Ilia Bouchouev
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Ilia Bouchouev: Pentathlon Investments, LLC

Chapter 8 in Virtual Barrels, 2023, pp 161-186 from Springer

Abstract: Abstract This chapter summarizes the main building blocks that make up the business of volatility trading. It starts by covering remarkable contributions of Louis Bachelier whose a century-old pricing formula is still being used by oil traders. The classical Black-Scholes-Merton framework of option replication is then presented in a more general setting of diffusion processes. We highlight the importance of distinguishing between three commonly used types of volatility: local volatility, realized volatility, and implied volatility.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sptchp:978-3-031-36151-7_8

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DOI: 10.1007/978-3-031-36151-7_8

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