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I am not sure if this fits here. But I am about to calculate implied volatility of options using the vollib (py_vollib) / lets_be_rational python library. Anyway, one of the input factos is Sigma, explained as annualized std dev./volatility. They always choose 0.2 and I don't see any explanation.

http://vollib.org/

The function implied_volatility_from_a_transformed_rational_guess_with_limited_iterations seems to be not depending on annualized volatility.

Is this one a necessary input? I see some iterative code and cannot figure out if they use the binomial tree to calculate the implied volatility.

MaBo88
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1 Answers1

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This probably wasn't answered because the question is probably more suited for https://quant.stackexchange.com/ .

Either way, it depends on how they are calculating Implied Volatility; however, you are right that in theory it shouldn't be necessary.

I'm sure you know, but the Implied Volatility is not the same as the realized volatility, sigma, you are referring to. The Implied Volatility is "the volatility implied by the option prices observed in the market" (Hull, 341).

It is essentially the volatility that makes the Black-Scholes-Merton Formula true.

I haven't look around in the actual code, and their documentation isn't great; but I would guess it's likely used as a starting point to reduce the number of iterations required to find the Implied Vol.

Edit: I just read through the source code, and you are right: sigma isn't used at all in the calculation of implied volatility.

laventnc
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