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Implied Volatilities

Posted: December 14th, 2023, 5:27 pm
by skafetaur
These details were extracted from yahoo_fin in Python. Please see attached screenshot. Why are implied volatilities so different? Per the put-call parity, the IV for a call and a put with all the same parameters should be the same. There may be small differences in the market, but not this large! Thanks in advance.

Re: Implied Volatilities

Posted: December 15th, 2023, 5:06 am
by Alan
The likely first guess (assuming the IV's are both constructed from the bid-ask average) is poor cost-of-carry parameters (dividend yield and interest rate). I recommend using the method in the VIX White paper to get those. The method actually produces an interest rate and a forward stock price, which suffices. But you can use those two values to also infer a dividend yield if you like. 

Re: Implied Volatilities

Posted: December 15th, 2023, 5:26 am
by Alan
Another possibility is the IV's were computed using the last trade prices (a bad idea), in which case the put price is an hour stale relative to the call -- and not even within the current bid-ask spread. But, this seems unlikely given the relative IV values.

Re: Implied Volatilities

Posted: December 16th, 2023, 6:43 pm
by skafetaur
Thanks Alan. So, would you say the IVs of the call and the put should very closely match up? In your experience, what would be the tolerable % difference between the call and put IVs (for a given strike and time to maturity), beyond which it would become an arbitrage opportunity? Thanks much for the insights.

Re: Implied Volatilities

Posted: December 17th, 2023, 5:19 am
by Alan
Yes, they'll match up closely near the at-the-money strikes. They'll match up exactly at the special strike in the VIX white paper which generates the forward price. 

Having said that, it's probably not too useful to think about arbitrage in terms of IV's. What matters for arbitrage are the tradeable prices (bid and ask). 

So, you can buy the stock, sell a call (at the bid) and buy a put (at the ask). It's a synthetic money market position. Is it worth it? Or, reverse the trades and get a synthetic borrowing. Is it a good rate?