Volatility not symmetrical ?
I heard upward volatility doesn’t necessary need to equal downward volatility. Just confused as I thought the black scholes model assumes this ? Is there an intuitive explanation for this or is it just an observed phenomenon.
Black Scholes assumes that volatility is constant across strikes and expiries, but we have observed empirically this is not the case. Think about how equity indices move: they drift up, crash down. So, the implied volatilities of the put side (ie strikes where the puts are OTM) should be higher than the ones on the call side
Thank you - and another random question. If you think volatility is mispriced for an option, wouldn’t that also mean that the underlying stock is also mispriced ?
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