How to Forecast Implied Volatility

Follow us on LinkedIn

How do you determine the volatility of an unlisted entity, and more generally, how do you forecast volatility? These are non-trivial questions. There is an interesting discussion on Stackexchange:

Here is a question I had for a long time but I never asked. Let’s take an easy example, AirBnb will likely have an IPO soon, the stock will be quoted on the market. Let’s say I would like to price an option on this stock, how would I proceed?

For sure I could sell some with a premium equal to the spot, and wait for the secondary market to adjust, and then extract the IV to do a better pricing, but I would still need to find people to buy at that price.

So in practice how does it work, there is no underlying historical data, nor implied volatility available. Read more

The following could be a solution

With completely no historical stock price, the best I can think of is to find several companies in the same business (e.g. BOOKING for AIRBNB) and look at the range of their vols. Then estimate which percentile it will be in this range according to the size of the company. This is very very raw estimate. Once the stock starts trading then you can adjust.

More discussion on volatility trading can be found in Colin Bennett’s book Trading Volatility: Trading Volatility, Correlation, Term Structure and Skew

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSNTT DATA UniKix Replatform Now Available in AWS Mainframe Modernization Service
NTT DATA UniKix Replatform Now Available in AWS Mainframe Modernization Service

NTT DATA and AWS cement their credentials as leaders for modernizing mainframe applications PLANO, Texas — NTT DATA, a digital business and IT services leader, announced it is working with Amazon Web Services (AWS) to provide its proven UniKix solution as part of the AWS…

Stay up-to-date with the latest news - click here
LATEST NEWSDrought-induced chaos at Panama Canal could spill over to Suez, shipping giant warns
Drought-induced chaos at Panama Canal could spill over to Suez, shipping giant warns

Couuld potentially affect cargoes of liquefied natural gas

Stay up-to-date with the latest news - click here
LATEST NEWSThe life advice that Charlie Munger gave Warren Buffett: Live life backwards
The life advice that Charlie Munger gave Warren Buffett: Live life backwards

Munger told Buffett, "he should write his obituary the way he wants it written, and then live his life accordingly," CNBC's Becky Quick said.

Stay up-to-date with the latest news - click here
LATEST NEWSHe Bought a Piece of the Chrysler Building. Now His Empire Is Falling Apart.
He Bought a Piece of the Chrysler Building. Now His Empire Is Falling Apart.

René Benko’s Signa filed for insolvency, marking one of the most dramatic falls in the property sector in recent years.

Stay up-to-date with the latest news - click here
LATEST NEWSA ‘true master of investing:’ Top value investor on how Charlie Munger changed the craft
A ‘true master of investing:’ Top value investor on how Charlie Munger changed the craft

The investing community lost one of its pillars Tuesday with the death of Charlie Munger, according to Ariel Investments' Charles Bobrinskoy.

Stay up-to-date with the latest news - click here

Leave a Reply