A method that is used to calculate the value of an at-the-money call option (under the assumption of zero interest rates) using the following formula:
C = σ S (T/2П)1/2 = 0.4 x σ x S x T1/2
where:
C is the call price
σ is the standard deviation of the underlying’s price (it is the implied volatility)
S is the underlying’s current price
T is the option’s life
П =3.14159
It follows, by rearranging the formula, that the implied volatility of the underlying is given by:
VolATM = (2П/T)1/2 x C/S0 = [2.5 x C]/[S0 (T)1/2]
For example, suppose a 6-month call option is trading at USD5 while the underlying is currently at USD100. The implied volatility of this option would be:
VolATM = (2П/0.5)1/2 x 5/100 = 12.53%
