A tool that measures the calculated or implied mid-rate volatility for an ATM option for a specific expiration date. In other words, at the money (ATM) volatility of an option is figured out by solving for the implied volatility of an ATM option. Using the Black-Scholes model, the ATM volatility can be defined as the volatility value that makes the implied price of an ATM vanilla option equal to the market price of that option.
ATM volatility can also be calculated for a futures contract, where it is usually interpolated between the two strikes in nearest months. For example, if the futures is settled at a price of 51.5, and if the 50 strike settles at 10 percent volatility, and the 52 strike settles at 11 percent, then the ATM volatility would be 10.75 percent:
ATM vol = [(11-10) (51.5-50)/(52-50)]+10=10.75.
Comments
Aaron J Davis
July 15, 2020 at 12:38 amLinear interpolation of ATM Volatility to 51.5 between 50(10) and 52(11) is (11-10)(51.5-50)/(52-50)+10=10.75, not 10.5. Please explain further.
Fincyclopedia
July 15, 2020 at 1:35 pmDefinitely true. For sure, it is a typo error. Correction is made. Thank you.