One of the first papers on implied volatilities was by Latane and Rendleman (1976).
He achieved this by averaging the implied volatilities of eight S&P100 Index options, being both calls and puts with different times to maturity.
As the investor fear gauge, some research has focussed on the predictive power of implied volatilities.
Friday prices are used to calculate implied volatilities.
Therefore, we construct an implied volatility index for the New Zealand market by first computing implied volatility indices for each stock individually and then combining the implied volatilities of the four stock option prices.
If volatility is random or path-dependent, and asset returns and volatilities are negatively correlated, then implied volatilities from option prices could be higher than the observed historical volatility from the underlying asset.
This section offers a computation of the implied volatilities from near-the-money options (options in which the strike price is as close as possible to the price of the underlying asset) on the S&P 500 and a simple but frequently used measure of historical volatility for each trading day over a six-year horizon, 1990 through 1995.
The means and standard deviations of the annualized implied volatilities and the annualized historical volatilities are shown in Table 1.
From 1990 to 1995, the average correlation between daily returns on the S&P 500 and the daily changes in implied volatilities was -0.
Another feature of implied volatilities that could adversely impact the seller of the straddle if the price of the underlying asset goes up is the so-called skew or smirk in implied volatilities.