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The parameter (sigma) is the historical volatility (stdev of annualized returns). Implied volatility is what you get if you run the formula backwards and input
by drexlspivey 3y ago
The parameter (sigma) is the historical volatility (stdev of annualized returns). Implied volatility is what you get if you run the formula backwards and input the observed price to solve for volatility. In practice though many people use implied volatility as the input making the whole thing circular.
- RandomLensman 3y agoIt's no really circular, just think of IV as the price/what is traded.