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Implied Volatility using Python's Pandas Library

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Python has some nice packages such as numpy, scipy, and matplotlib for numerical computing and data visualization. Another package that deserves a mention that we have seen increasingly is Python's pandas library. Pandas has fast and efficient data analysis tools to store and process large amounts of data. Additionally, pandas has numpy and ctypes built into it which allow easy integration with NAG's nag4py package.

Below is an example using nag4py and the pandas library to calculate the implied volatility of options prices. All the code below can be downloaded to calculate your own implied volatility surface for data on the Chicago Board of Options Exchange website.


Background on Implied Volatility

The famous Black Scholes formula for pricing a Call/Put option on a stock is a function of 6 variables; Underlying Price, Interest Rate, Dividends, Strike Price, Time-to-Expiration, and Volatility. Note that for a given option contract we can observe the Underlyi…