Please shed some lights on how to interpret this chart. Banker said it’s the historical ATM vols chart for Brent Crude, and then the value jumped up and down from 20+ to 12+ then to 18+ then to 13+ now.
What are these value mean? How to interpret this chart?
How was the value calculated?
This is related to Put Option. Background is we have oil to sell and requirement of bank is to buy put option at certain price ($60-$80/bbl)
Asking brother Google but seems not helpful T_T
Don’t know why I can’t attach image into the post, so I post the google link instead
Usually, a big drop like that is because of volatility disappearing, but it’s possible that between Ukraine and Syria and Iraq, no one thinks they are going to need to lock in a sales price for crude, so the price of puts has gone down.
Also, these charts look more dramatic than they really are because the y axis as shown does not go to zero.
Hi Bchad,
Thanks. Can you share:
What are these value mean? How to interpret this chart?
How was the value calculated?
Thanks much,
Well, I just skimmed your post above. If they were historical values for ATM puts, then they are calculated from market prices.
Reading more closely, it looks like it is the price of the ATM put, given the volatility of the underlying contract and other things such as LIBOR (which is almost 0% these days), and time to maturity, stuck into the Black-Scholes pricing model… That would suggest that the volatility dropped off by about 25% and then rose again.
The gradual downward slope is theta decay, because as you get closer to the option expiry, there is less time for an ATM option to make big money-making moves, and so the price drops slowly.
If there’s a need to use BS model, what is the the strike price used here?
What is the unit measure of this chart, is it % or something?
Still can’t get how the analyst behind this chart calculate and generate the chart…
It’s at the money. So the strike price is whatever the spot price is that day, presumably at the close. The strike price this changes each day.
My guess is the price is dollars per put, though I suppose it could be a percent of the strike price.
My best guess is it is the price of an ATM contract at the close of the day for each day on the calendar, but I don’t really know the context of the discussion that generated the chart, so I can’t tell for sure.
Did you press the “HELP” button once on the screen to see the description? Did you press the “HELP” button twice to ask the lovely person sitting in the chat-center?
I don’t have access to Bloomberg, boss just forwarded me and asked me to explain :-s
It looks like it’s the constant 50 day implied volatility of atm crude options (bottom left of screengrab). Put or call is irrelevant. He’s probably just showing you this so you get an idea of what kind of price you might expect to pay for a hedge. My guess is he wants you to buy puts so he’s showing how the price now is lower than it has been in the past.