Hi R,

 

I am trying to extract the implied probability from options on
individual stocks.

 

I have taken the near month (1 month) call options (American) and
removed strikes with zero volume. But I end with just three strikes and
all of them OTM.

 

Date

Expiry

Strike.Price

Settle.Price

Spot

29-Dec-06

25-Jan-2007

900

27.75

891.5

29-Dec-06

25-Jan-2007

940

12.5

891.5

29-Dec-06

25-Jan-2007

920

19.75

891.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I will compute the implied volatility and delta using the fOptions
package. I intend to use the splines package to interpolate in the
implied volatility-delta space. My question is are just 3 strikes
sufficient to interpolate and extract a meaningful implied probability?
Any pointers or paper that deals with extracting implied probability
from thin options markets would be helpful.

 

 

Thank you,

Regards,

 

Ravi Shankar S

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