Intraday Data Processing Approach of Calculating Black and Scholes (1973) Implied Volatility: Calculating Method

Abstract

The aim of this paper is to present the intraday sampling process of deriving the Black and Scholes (1973)’s model, followed by the method of estimating intraday realized volatility. As we discuss the relevant factors influencing implied volatility estimation, we justify our choice of both Black-Scholes model as well as filtering data criteria.  In this work the Black and Scholes (1973) model is chosen to compute implied volatility although it is well known that this model significantly misprices options. This pricing failure results from error in variable problems introduced by misspecification that is violation of one or more of the assumptions made by the Black and Scholes (1973) model. Consequently, the focus here will be on all possible sources of these problems and thus of the bias that has been reported in the literature of the volatility forecasting ability of option prices. Understanding the source of these problems will be helpful to develop improved methods for removing the implied volatility bias (errors). A particular attention is drawn to the explanation of dividend estimation and time to maturity of the option.