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the market underprices implied volatility on long term options, because it just doesn't know, which is an absolutely awesome.
by vmception 6y ago
the market underprices implied volatility on long term options, because it just doesn't know, which is an absolutely awesome.
- KMag 6y agoWhat do you mean by underprice implied vol? I think what you mean is that vol is underpriced, not implied vol being underpriced. Implied vol is just a function of 4 factors known at at the time of the trade (underlyer spot price, option premium, option strike, time to expiry) and one unknown (risk-free interest rate over the lifetime of the option). Saying they've gotten implied volitility wrong implies they've mis-entimated the risk-free interest rate. I think instead you mean they under-estimate vol, not implied vol.