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23 August 2022 Financial Analysts Journal

Option Pricing via Breakeven Volatility

  1. Blair Hull
  2. Anlong Li
  3. Xiao Qiao
Calculating breakeven volatility based on S&P 500 options data, this study builds a predictive model that provides a link between option characteristics and breakeven volatility. A simulated trading strategy demonstrates the model’s economic value.
Read the Complete Article in the Financial Analysts Journal CFA Institute Member Content


The fair value of an option is given by breakeven volatility, the value of implied volatility that sets the profit and loss of a delta-hedged option to zero. We calculate breakeven volatility for 400,000 options on the S&P 500 and build a predictive model for these volatilities. A two-stage regression approach captures the majority of the observed variation. By providing a link between option characteristics and breakeven volatility, we establish a non-parametric approach to pricing options without the need to specify the underlying price process. We illustrate the economic value of our approach with a simulated trading strategy based on breakeven volatility predictions.

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