how to calculate implied volatility in excel?

cuffauthor2023/11/28 11:31:28

Implied volatility is a measure of the uncertainty in the future price of a stock, option, or other financial asset. It is calculated using the Black–Scholes model and is an important tool for traders and investors to understand the risk of their positions. In this article, we will show you how to calculate implied volatility in Excel, using the Black–Scholes formula and the current market data.

Step 1: Set Up the Workbook

First, set up a new Excel workbook. Create four columns: Date, Stock Price, Exercise Price, and Number of Shares. Also, create a fifth column called Implied Volatility.

Step 2: Enter the Market Data

Enter the necessary market data for the option in the corresponding columns. For example, if you are going to calculate the implied volatility of a call option with a May expiration, you would enter the current stock price, the option's exercise price, and the number of shares being bought or sold.

Step 3: Calculate the Implied Volatility

In the Implied Volatility column, use the Black–Scholes formula to calculate the implied volatility. The formula is as follows:

Implied Volatility = sqrt(2 * (Log(Strike / Current Stock Price) / (Expiration Date - Today's Date))

Where:

- Strike is the option's exercise price

- Current Stock Price is the stock's current price

- Expiration Date is the option's expiration date

- Today's Date is the current date

Step 4: Check the Calculations

To check your calculations, compare the implied volatility value with the actual volatility of the asset. The actual volatility can be found in various financial newsletters, websites, or by using a stock quote provider. If the calculated implied volatility is close to the actual volatility, then your calculations are correct.

Calculating implied volatility in Excel is a straightforward process using the Black–Scholes model. Understanding implied volatility can help traders and investors make more informed decisions about their positions and manage the risk associated with them. By practicing this skill, you will be better equipped to navigate the complex world of finance.