And more speculatively, booms and busts seem more likely for stocks that have gone up a ton, and when new technologies are being introduced.
If I understand correctly, you are interpreting the above as stating that the implied volatility would be higher in a more efficient market. But I originally interpreted it as claiming that big moves are relatively more likely than medium-small moves compared to other options with the same IV (if that makes any sense)
Taking into account volatility smiles and all the things that I wouldn’t think about, as someone who doesn’t know much about finance and doesn’t have Bloomberg Terminal, is there an easy way to answer the question “what is the option-prices-implied chance of NVDA falling below 450 in a year?”
I see that the IV for options with a strike of 450 next year is about ~70% for calls and ~50% for puts. I don’t know how to interpret that, but even using 70%, this calculator gives me a ~16% chance, so would it be fair to say that traders think there’s a ~15% chance of NVDA falling below 450 in a year?
The IV for puts and calls at a given strike and expiry date will be identical, because one can trivially construct a put or a call from the other by trading stock, and the only frictions are the cost of carry.
The best proxy for probability an option will expire in the money is the delta of the option.
Looking at the delta here and here, the market would seem to imply a ~5% chance of NVDA going below 450, which is not consistent with the ~15% in the article derived from the IV. Is it mostly because of a high risk-free interest rate?
I wonder which value would be more calibrated, or if there’s anything I could read to understand this better. It seems valuable to be able to easily find rough market-implied probabilities for future prices.
Generally I just wouldn’t trust numbers from Yahoo and think that’s the Occam’s Razor explanation here.
Delta is the value I would use before anything else since the link to models of reality is so straightforward (stock moves $1 ⇒ option moves $0.05 ⇒ clearly that’s equivalent to making an extra dollar 5% of the time)
Just had another glance at this and I think the delta vs implied vol piece is consistent with something other than a normal/log normal distribution. Consider: the price is $13 for the put, and the delta is 5. This implies something like—the option is expected to pay off a nonzero amount 5% of the time, but the average payoff when it does is $260 (despite the max payoff definitionally being 450). So it looks like this is really being priced as crash insurance, and the distribution is very non normal (i.e. circumstances where NVDA falls to that price means something weird has happened)
Can you explain? I see why the implied vols for puts and calls should be identical, but empirically, they are not—right now calls at $450 have an implied vol of 215% and puts at $450 have an implied vol of 158%. Are you saying that the implied vol from one side isn’t the proper implied vol, or something?
Right now the IV of June 2025 450 calls is 53.7, and of puts 50.9, per Bloomberg. I’ve no idea where your numbers are coming from, but someone is getting the calculation wrong or the input is garbage.
The spread in the above numbers is likely to do with illiquidity and bid ask spreads more than anything profound.
If I understand correctly, you are interpreting the above as stating that the implied volatility would be higher in a more efficient market. But I originally interpreted it as claiming that big moves are relatively more likely than medium-small moves compared to other options with the same IV (if that makes any sense)
Taking into account volatility smiles and all the things that I wouldn’t think about, as someone who doesn’t know much about finance and doesn’t have Bloomberg Terminal, is there an easy way to answer the question “what is the option-prices-implied chance of NVDA falling below 450 in a year?”
I see that the IV for options with a strike of 450 next year is about ~70% for calls and ~50% for puts. I don’t know how to interpret that, but even using 70%, this calculator gives me a ~16% chance, so would it be fair to say that traders think there’s a ~15% chance of NVDA falling below 450 in a year?
In general, I think both here and in the accompanying thread finance professionals might be overestimating people’s average familiarity with the field.
The IV for puts and calls at a given strike and expiry date will be identical, because one can trivially construct a put or a call from the other by trading stock, and the only frictions are the cost of carry.
The best proxy for probability an option will expire in the money is the delta of the option.
Thank you. Here’s an explanation from Wikipedia for others like me new to this.
Looking at the delta here and here, the market would seem to imply a ~5% chance of NVDA going below 450, which is not consistent with the ~15% in the article derived from the IV. Is it mostly because of a high risk-free interest rate?
I wonder which value would be more calibrated, or if there’s anything I could read to understand this better. It seems valuable to be able to easily find rough market-implied probabilities for future prices.
Generally I just wouldn’t trust numbers from Yahoo and think that’s the Occam’s Razor explanation here.
Delta is the value I would use before anything else since the link to models of reality is so straightforward (stock moves $1 ⇒ option moves $0.05 ⇒ clearly that’s equivalent to making an extra dollar 5% of the time)
Just had another glance at this and I think the delta vs implied vol piece is consistent with something other than a normal/log normal distribution. Consider: the price is $13 for the put, and the delta is 5. This implies something like—the option is expected to pay off a nonzero amount 5% of the time, but the average payoff when it does is $260 (despite the max payoff definitionally being 450). So it looks like this is really being priced as crash insurance, and the distribution is very non normal (i.e. circumstances where NVDA falls to that price means something weird has happened)
Can you explain? I see why the implied vols for puts and calls should be identical, but empirically, they are not—right now calls at $450 have an implied vol of 215% and puts at $450 have an implied vol of 158%. Are you saying that the implied vol from one side isn’t the proper implied vol, or something?
Right now the IV of June 2025 450 calls is 53.7, and of puts 50.9, per Bloomberg. I’ve no idea where your numbers are coming from, but someone is getting the calculation wrong or the input is garbage.
The spread in the above numbers is likely to do with illiquidity and bid ask spreads more than anything profound.