If every option has a different IV, what is the underlying IV? and what do they ...
This comment was posted to reddit on Dec 08, 2022 at 12:31 pm and was deleted within 1 day, 12 hour(s) and 24 minutes.
If every option has a different IV, what is the underlying IV? and what do they mean?
The heat equation is the basis for Black Scholes.
The surface shape can vary wildly because each maturity has its own volatility curve/smile.
IV is a mathematical representation of standard deviation, it enables some pretty useful variance math, it is an input in the Black Scholes model, and it is the lingua franca of options trading.
IV fluctuates as expectations of variance change, and sometimes it goes higher than what the characteristics of the underlying asset seem to justify. People sell IV when they think it is higher than what the asset will "realize". Generally when they talk about IV they are referring to at the money IV, and when they talk about "skew" they are referring to the ratio or difference between away-from-the-money IV and at the money IV.
Many traders have no idea what they're doing, but a professional may trade tens or hundreds of thousands of contracts a day and they tend to be fairly competent.