When determining their view on implied volatility in order to price an option, market-makers will consider:

Question

BlackTom AI · Accepted Answer

Volatility is mean-reverting, so market-makers combine recent realized moves with the long-term average when forming an implied-volatility view.

1. Relevant knowledge points and concepts
- Implied volatility (IV) reflects the market’s expectation of future volatility used in option pricing.
- Realized (historical) volatility shows what occurred recently; both short-term shocks and long-term behavior matter.
- Volatility exhibits clustering and mean reversion (stochastic volatility and GARCH/Ornstein–Uhlenbeck models capture this), so extreme short-term moves tend to revert toward a long-run mean.
- Option dealers therefore consider both recent realized/expected short-term moves and the long-term mean when setting IV and quoting prices.

2. Step-by-step reasoning
- A market-maker assesses recent realized volatility (to capture current market stress or calm) and the long-term mean (to account for reversion over the option’s remaining life).
- If recent volatility is unusually high, the market-maker will raise near-term IV but temper that increase by the long-term mean for longer-dated options.
- Conversely, if recent volatility is unusually low, the long-term mean prevents understating expected future volatility.

3. Illustrative calculation (intermediate steps)
- Example: recent realized vol = 60%, long-term mean = 20%. A simple weighted estimate might be used:
  - Choose weights reflecting horizon/conviction, e.g., 50% recent, 50% long-term.
  - Estimated IV = 0.5*60% + 0.5*20% = 30% + 10% = 40%.
- Different weights change the estimate, but the principle remains: combine short-term observation with long-term mean.

4. Why the correct answer is correct
- Because volatility is mean-reverting, relying solely on short-term or only on the long-term mean would misstate expected future volatility for many option horizons. Combining both provides a balanced, realistic IV estimate.

5. Why other choices are incorrect
- “Weight 2/3 long-term and 1/3 short-term”: too prescriptive—market-makers do not use a universal fixed fraction.
- “Long-term mean only”: ignores current market conditions and short-term shocks.
- “Recent only”: ignores mean reversion and long-term tendencies, which matters especially for longer-dated options.

6. Conclusion
- The correct answer is: “What has happened recently as well as what the long-term mean value because volatility is mean-reverting over the longer term,” which matches the provided answer.

When determining their view on implied volatility in order to price an option, market-makers will consider:单项选择题

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