Implied Volatility from Black-Scholes price

Dan Stefanica and Rados Radoicic propose a quite good initial guess in their very recent paper An Explicit Implied Volatility Formula. Their formula is simple, fast to compute and results in an implied volatility guess with a relative error of less than 10%.

It is more robust than the rational fraction from Minquiang Li: his rational fraction is only valid for a fixed range of strikes and maturities. The new approximation is mathematically proved accurate across all strikes and all maturities. There is only the need to be careful in the numerical implementation with the case where the price is very small (a Taylor expansion of the variable C will be useful in this case).

As mentioned in an earlier post, Peter Jäckel solved the real problem by providing the code for a fast, very accurate and robust solver along with his paper Let’s be rational. This new formula used as initial guess to Minquiang Li SOR-TS solver provides an interesting alternative: the resulting code is very simple and efficient. The accuracy, relative or absolute can be set to eventually speedup the calculation.

Below is an example of the performance on a few different cases for strike 150, forward 100, time to maturity 1.0 year and a relative tolerance of 1E-8 using Go 1.8.

Original volatility Method Implied Volatility Time
64% Jäckel 0.6400000000000002 1005 ns
64% Rational 0.6495154924570236 72 ns
64% SR 0.6338265040549524 200 ns
64% Rational-Li 0.6400000010047917 436 ns
64% SR-Li 0.6400000001905617 568 ns
16% Rational 0.1575005551326285 72 ns
16% SR 0.15117970813645165 200 ns
16% Jäckel 0.16000000000000025 1323 ns
16% Rational-Li 0.16000000000219483 714 ns
16% SR-Li 0.16000000000018844 1030 ns
4% Rational 0.1528010258201771 72 ns
4% SR 0.043006234681405076 190 ns
4% Jäckel 0.03999999999999886 1519 ns
4% Rational-Li 0.040000000056277685 10235 ns
4% SR-Li 0.040000000000453895 2405 ns

The case 4% was an example of a particularly challenging setting in a Wilmott forum. It results in a very small call option price (9E-25).

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© 2006-16 Fabien Creative Commons License This work is licensed under a Creative Commons Attribution 4.0 International License.