What you will learn
- Option prices and implied volatility
- Maturity dependence
- Skew
- Risk premium interpretation limits
Option prices and implied volatility
Implied volatility is inferred from an option price through a chosen valuation model and inputs. It is not a directly observed future realized volatility. Different pricing assumptions or data quality can affect the inferred value.
Maturity dependence
Maturity matters: an option expiring tomorrow and one expiring months later reflect different horizons. Compare like maturities or use an explicit interpolation method, recording its assumptions.
Skew
Skew describes variation across strikes or related moneyness measures. A single at-the-money value does not summarize all nonlinear exposure. Inspect which portion of the surface is relevant to the position.
Risk premium interpretation limits
The difference between implied and later realized volatility is not automatically an accessible risk-free profit. Trading volatility involves option pricing, hedging, costs, jumps and risk premia; a simple subtraction omits those mechanics.
Worked example
Two options have different implied volatilities but different maturities and strikes. Calling one cheap solely because its number is lower ignores that they reference different portions of the surface.
Try it yourself
List the fields needed for a meaningful implied-volatility comparison and one reason the comparison still would not be a complete trading decision.
Show the worked solution
Match underlying, timestamp, maturity, strike or moneyness, model and price quality. Then consider spread, hedging assumptions and exposure. A normalized comparison is evidence, not an automatic executable opportunity.
Apply this to your course project
Compare several volatility estimates and document where their forecasts fail.
Keep the calculation inputs, assumptions and decisions with your work. Practical exercises are self-reviewed; the scored knowledge checks assess the questions shown, not an independent certification of practical competence.