Implied Volatility and Volatility Smiles in Option-Pricing-Based Security and Business Valuations

Eric Sundheim

doi:10.5791/0882-2875-34.1.31

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Article Contents

Introduction
OPM in Privately Held Security and Company Valuation
Volatility Input
Volatility Smiles
Example: Multiple Volatilities
Ivol Problems
Conclusion
References

Editorial Type:

Article Category: Research Article

Online Publication Date: 01 Jan 2015

Implied Volatility and Volatility Smiles in Option-Pricing-Based Security and Business Valuations

Page Range: 31 – 38

DOI: 10.5791/0882-2875-34.1.31

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In estimating target companies' volatilities, practitioners typically consider the volatility of guideline public companies (GPCs). This paper discusses various methods for estimating GPC volatilities with a focus on implied volatilities and volatility smiles. The paper finds that implied volatilities are theoretically superior to volatilities calculated from historical data, although the usefulness of implied volatilities is often limited by the availability of option data.

Figure 1

Common Share Payout Modeled as a Portfolio of Options

Figure 2

Volatility Smile for Foreign Currency Options

Figure 3

Volatility Smile for Equity Options

Figure 4

LNKD Call Options Expiring January 17, 2015, as of March 17, 2014

Contributor Notes

Eric Sundheim is a Vice President at Palo Alto, California-based Teknos Associates. Mr. Sundheim has helped hundreds of private companies comply with Internal Revenue Code Section 409A and value their complex securities. He has also provided valuation services in several litigation matters. Prior to his role at Teknos, he was a Senior Consultant at Precision Economics, where he worked on some of the world's largest transfer pricing disputes. Mr. Sundheim is an Accredited Member of the American Society of Appraisers.