The volatility of the price of the underlying security that is implied by the market price of an option based on an option pricing model.

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26 views

Implied Volatility as proxy for instantaneous volatility

In many papers and book I have found a reasoning that it is well summarized in this paper as "The first proxy we use is an unadjusted Black-Scholes proxy in which the implied volatility of a ...
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1answer
86 views

What are some markets that don't have volatility smiles and why don't they?

I have read that volatility smiles didn't show up for equity options until 1987. Can some one give me an example(s) of what markets now still don't have volatility smiles and what an explanation for ...
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145 views

How to calculate Implied Volatility for out-of-the-money options?

I'm trying to calculate the implied volatility for out-of-the-money options, and to a lesser extent, in-the-money options. Most of the literature estimations I could find for implied volatility were ...
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59 views

Constant Maturity IV

I want to analyze IV skew under various market conditions but its hard given various expirations. Would it make sense to create a constant maturity IV that say is 60 DTE? Has anyone done this and what ...
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2answers
95 views

Probability that realized volatility is larger than implied volatility

I did a test about quantitative finance. One of the question was : What is the probability, in the Black-Scholes world, that the realized volatility is larger the implied volatility ? And why ? ...
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1answer
35 views

Rate of Options decay

I know "Time decay accelerates on nearing expiry". But I want to know the rate of acceleration. How curvy is the theta curve? Answers could be like, Provided IV is stable, in a 3-month ...
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3answers
65 views

Sensitivity of short-term vs long term options' IV

I could see that the short-term options' IV raises on earnings announcements when longer-term options' IV does not react too much. So I had this doubt, "Is the volatility of short-term options' IV ...
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126 views

Transforming 3M volatilities into 6M volatilities in EUR forecast curves

I have implemented a bootstrapping algorithm to extract forward volatilities from cap/floor flat volatilities for different currencies. I am however struggling a bit when implementing a method to ...
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31 views

IV of stocks vs IV of options

As for as I have seen, Implied volatility of stocks are easy to understand as there will always be a peak and fall(usually on earnings announcement dates). The magnitude differs but the wave pattern ...
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118 views

Why is the term structure of the implied volatility surface non-monotonic?

Does this reflect expectations & uncertainty about interest rates (exposure to rho?), event driven concerns about the underlying, or something else?
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50 views

Interpolating on the BS parameters and injecting in the BS formula vs interpolating directly on option prices

Let's consider a simple European call option. In practice, the way the Black-Scholes formula is used to price it is by injecting all of the parameters and paying special attention to the volatility ...
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1answer
112 views

Calendar Arbitrage in a Vol Surface

I am trying to determine the condition such that my implied vol surface doesn't have calendar arbitrage. I have done research and found that one such condition is that total variance should increase ...
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29 views

Inverse Smile Volatility Ibex35

I was analysing ibex implied volatility and when I draw it I found it was reversed: X axis are the strikes and Y axis implied volatilities calculated by BS. The blue line is the spot price. Data ...
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25 views

What kind of crisis can drag Implied Volatility down globally?

I want to trade buying long straddles with low IV ranks. I wonder what could be a crisis for me. I believe any kind of economical crisis would increase the IV. What happening could be a crisis for me? ...
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1answer
194 views

Implications of shifting the lognormal model for forward rates from a probability perspective

I have a question regarding the application of a shift to the Black-Scholes formula for negative forward rates. I am reading in the Brigo book that "increasing the shift $\alpha$ shifts the ...
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36 views

Vol surface changes as underlying moves

We market make in highly liquid, near term options markets. I want to build a risk report that tells us how our portfolio's greeks will change as the underlying moves. This is for risk management in ...
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4answers
131 views

How to select the initial guess for implied volatility?

When we calculate the implied volatility, we would need to give the solver a range to start with. For example, QuantLib uses [0,4.0] for the range, which is another way of saying try all possible ...
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24 views

FX Implied Volatility for Longer Term Maturities

To my knowledge, FX implied volatility can only be obtained from the market for time horizons up to about 5 years due to liquidity limitations. So how would we obtain volatility estimates for longer ...
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1answer
48 views

Why is there an upper limit on the premium of an ATM (!) call swaption in the Black76 model?

Trying to imply Black76 (where the forward swap rate is log-normal) volatilities as Bloomberg does in their VCUB screen we see holes at two regions: at short maturities due to negative rates which ...
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3answers
141 views

Is Complete Vega Elimination Possible?

I avoid short selling in my strategies. Losing more than invested is not attractive. But at times the implied volatility is too high, I am worried about buying at all and I am trying to filter the ...
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1answer
62 views

What is the formula that determines when VIX futures expire?

Or a source that will allow me to just get the list of dates into a program, I'm trying to do this in python but I want it to be able to figure out the next expiration automatically, or something like ...
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2answers
89 views

Difference in implied volatility calculation

I've been using vollib to calculate IV, but my answers have been different by tenths from other sources like NASDAQ and Yahoo. The answers range +- 0.5, sometimes even more. The inputs are: $S$ ...
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1answer
85 views

Determining the implied volatility for options with bid/ask prices below the intrinsic value

I need some help in understanding the Black-Scholes option pricing model. In my data there are several deep itm European index put options that have an ask price below the intrinsic value. ...
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2answers
147 views

Constructing a minute-by-minute volatility curve

For market making in front month vanilla commodity options we need a volatility curve that updates every second or so as the underlying and the options change prices. If all the strikes have a good ...
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1answer
82 views

How to get Correlation using Options data?

I can calculate the "Implied Beta" using implied volatility for the option stock, and implied volatility for the market (VIX). Is there any way to calculate also the correlation without performing a ...
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1answer
44 views

Valuation of option on amortized IR swap

I'm currently valuing swaptions using an implied volatility surface and Black's formula. This formula is given by $$A (S\Phi(d_+) - K \Phi(d_-))$$ where $$ d_{\pm} = \frac{\log\left(S/K\right) \pm ...
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1answer
84 views

Option Chain Implied Volatility Calculation

I have the following EOD options data for the SPY containing IV data for each strike. ...
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183 views

How to derive this approximation of the risk-neutral expectation of the variance?

On the paper Bollerslev, Tauchen and Zhou (2009 RFS) the authors say about equation (15): The corresponding model implied risk-neutral conditional expectation ...
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54 views

Implied volatility: sensitivity to the underlying spot price

Is there a formula for determining the sensitivity of IV to the underlying spot price?
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1answer
74 views

how to do interpolation in the term structure of volatility surface?

everyone~ I am a newbee in the quantitative finance and I meet a problem in working out an equity option volatility surface. We use the reasonable market data to derive the implied volatility, then ...
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26 views

commodities index volatility

Suppose that the average one year implied at-the-money volatility of the sub sector indices making up the BCOM is at 20% and that the sub sectors are uncorrelated. Bearing in mind the effect of ...
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1answer
133 views

Estimate Beta of CAPM from Implied Volatility?

In the CAPM theory Beta of asset $i$ are estimated in this way: $ \beta_i = \frac{\sigma_{im}}{\sigma^2_m} $ where $\sigma_{im} = \rho_{im} \sigma_i \sigma_m$ But all these data are historical data. ...
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1answer
62 views

pricing with implied volatility surface

I am a newbee in Quantive finance. supposing I calibrate a smoothing implied volatility surface with cubic spline now. A minute later I want to price K=100,t=1 option, can I just find the point on ...
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1answer
129 views

Extrapolating SVI

In his paper Gatheral presents the following parametrization of the implied total variance $w(k,T) = \sigma_{BS}(k,T)^2T$ $$ w(k) = a + b\{\rho (k-m) + \sqrt{(k-m)^2 + \sigma^2} \}.$$ Assuming that ...
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149 views

Tradable information from BS Implied volatility

These are two follow up questions to: Implied volatility as price transform I understand that the BS model is used as a 'Blackbox' that takes a market price and maps it in a 1to1 fashion to a 'BS ...
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1answer
67 views

Implied volatility as price transform

Implied volatility The way I understand it, traders often think of implied volatility as a transformed price. So in a way, the Black Scholes model is considered a 'model-free' blackbox that takes a ...
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72 views

Comparing Implied Vol. to Historical Vol. using intraday data

I'm interested in estimating what my profit/loss would be for continuously gamma scalping a delta hedged option over the course of one day, using historical intra-day price data. I found an equation ...
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23 views

Spotting humps in implied volatility term structure

Sometimes implied volatility term structure performs a hump shape. How can I measure the frequency of hump appearence? Basically, I have several years of daily data on IV TS, how can I count the ...
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157 views

Formula behind pandas.Options() implied volatility

I noted that implied volatility (IV field) from pandas.Options class is very different (especially, for out of money options) than what I compute with Black-Scholes model. (risk free rate is pulled ...
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1answer
126 views

Calculating historical implied volatility

I know that each individual option has it's own implied volatility, but how do you go about calculating the overall implied volatility for an underlying? For example when someone sais the IV of a ...
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79 views

Delta Volatility Surface Usage to value the option

I always find myself in the unknown charted territory when it comes to non-Linear Instruments. I come across the scenario, How to value the option using Delta Vol surface? Example I have CME traded ...
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27 views

Volatility Skew for Put and Call options [closed]

Given that the implied volatility follows volatility skew, which one has higher implied volatility? At-the-money put 40 (spot = strike = 40) or at-the-money call 160 (spot = strike = 160)? I am not ...
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1answer
90 views

SABR Implied Volatility and Option Prices

I am trying to understand SABR model. I am having difficulty to understand how to calibrate ABR a) the initial variance b) the volatility of variance c) the exponent for the forward rate d)the ...
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344 views

Historical Volatility vs Implied Volatility Performance in Pricing Options

I consistently read on academic papers, when pricing options, using implied volatility is better than using historical volatility. Because, market is more "forward-looking" and historical data is ...
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1answer
228 views

Delta Hedging with fixed Implied Volatility or floating Implied Volatility?

When delta hedging an option until expiry at implied volatility, is it better to rehedge using the fixed implied volatility given by the option price upon its purchase (or sale), or to rehedge using ...
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1answer
53 views

Applying interest rate models for volaility rate

To what extent may the interest rate models be applied for modeling implied volatity? The story: I was checking different stochastic option pricing models for being able to replicate implied ...
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3answers
128 views

Implied volatility of a complex options position

Assume I have a "complex" options position like a straddle, strangle, or iron condor. In other words, several options traded together as a single position against one underlying asset (not a basket ...
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2answers
417 views

Why linear interpolation not appropriate for volatility surface construction?

We know linear interpolation is not appropriate for constructing a surface, but why? In the book, "Foreign Exchange Option Pricing: A Practitioners Guide", the author writes: native linear ...
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2answers
146 views

Bloomberg implied volatility smile for equities

I was wondering if someone knows how Bloomberg does their computations for the implied volatility smile for equities. As far as I understand, they use a lognormal mixture to model the stock prices. ...
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75 views

Citable source: Why implied volatility over dollar prices

I am aware of the reasoning of quoting vanilla options as implied volatilities rather than dollar values. However, I would like to have a literature reference where this is explained, to quote / cite ...