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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Option Trading using Implied and Breakeven Volatility |
| Other Titles | Banking & Finance MSc UZH ETH in Quantitative Finance |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 78 |
| Date | 2023 |
| Abstract Text | This study explores the concept of breakeven volatility (BEV) as an unbiased estimator of an option’s fair implied volatility and its applicability in option pricing. Historical BEVs are computed for 230,000 S&P 500 index option contracts, and a predictive model is built to produce contemporaneous estimates. The model is compared to a similar implementation based on implied volatility instead of BEV, by testing both models’ pricing ability in an out-of-sample trading environment. The findings consistently demonstrate that the BEV model outperforms the implied volatility model, illustrating the unique value of using BEV as a measure of an option’s fair volatility level to price options. This research contributes to the limited literature on empirical option pricing using BEV, emphasizing its potential as a tool for accurate option pricing. Keywords: breakeven volatility, implied volatility, option pricing, SPX index options |
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