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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Volatility Smile Approximation

Does anyone know what type of model is used to model the skew and IVs inside Thinkorswim platform for its volatility smile approximation? I am trying to replicate but do not know where to start. Any ...
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1answer
121 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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1answer
21 views

ATM volatility and flat volatility

Why do the implied volatility curve and the flat curve cross over the ATM volatility (at 100%) ? Tx
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1k views

How to exploit calendar arbitrage?

Say we are looking at European Call options in a toy environment with zero deterministic intereset rates, a stock paying no dividends, no repo rates etc. Let C(T,K) be the price of a call with expiry ...
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135 views

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

I have implemented a stripping algorithm to extract forward volatilities from cap/floor flat volatilities for different currencies. I am however struggling a bit when implementing a method to convert ...
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1answer
32 views

SABR Calibration: Normal vs Log-Normal Market Data

This question is about getting some clarification as to how to understand market quotes for normal & log-normal vols together with certain model assumptions. So let us define ...
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1answer
141 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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2answers
164 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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2answers
32 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
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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1answer
127 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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1answer
89 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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2answers
149 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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1answer
168 views

Hedging - calculating option prices using implied volatility surface

To hedge a strategy is it accurate "enough" to price an option using an implied vol curve vs moneyness (strike/spot) assuming sticky delta? The moneyness can be read off the chart, its corresponding ...
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3answers
61 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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3answers
71 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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1answer
36 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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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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2answers
122 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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1answer
51 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
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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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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346 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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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
134 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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2answers
148 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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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
64 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 ...
3
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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: $S$ ...
4
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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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1answer
584 views

European Swaptions: does implied volatility of swap rates decreases both with start and tenor?

Does implied volatility of swap rates decreases both with start and tenor? Given a Swaption price and a discount curve I calculate the swap_rate from the curve, then I define implied volatility as ...
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27k views

How to compute Implied Volatility Calculation?

We all know if you back out of the BS option pricing model you can derive and solve what the options is "implying" as its volatility. However, what is the formula used to derive Implied Volatility ...
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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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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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5answers
462 views

Does an implied volatility always exist for a binary option?

I'm trying to compute the implied volatility of a binary option but I cannot get some of the strikes to reach a convergent solution using either a Monte Carlo pricing model or an analytical Black ...
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1answer
45 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
85 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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2answers
184 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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7k views

Why does implied volatility show an inverse relation with strike price when examining option chains?

When looking at option chains, I often notice that the (broker calculated) implied volatility has an inverse relation to the strike price. This seems true both for calls and puts. As a current ...
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55 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
76 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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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
93 views

How do I track implied volatility of specific delta?

I'm a newbie with respects to volatility trading and options. I recently purchased a book on the topic called "Trading Implied Volatility -An introduction" by Simon Gleadall. It's been one of the most ...
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1answer
138 views

Volatility Surface Constituents, do's and dont's

Recently I have been working a lot with implied volatility and volatility surfaces. The basic idea is easy to follow: 1) Gather market prices of options at different (Strike,Expiry) 2) Calculate ...
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63 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 ...