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Options and Volatilities

In: Virtual Barrels

Author

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  • Ilia Bouchouev

    (Pentathlon Investments, LLC)

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.

Suggested Citation

  • Ilia Bouchouev, 2023. "Options and Volatilities," Springer Texts in Business and Economics, in: Virtual Barrels, chapter 8, pages 161-186, Springer.
    • Handle: RePEc:spr:sptchp:978-3-031-36151-7_8
    DOI: 10.1007/978-3-031-36151-7_8
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