Questions tagged [implied-volatility]
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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how to derive overnight FX implied vol and how to translate into implied breakeven
is there a good link or explanation how to get a specific day (next month's 1st trading day, etc) overnight implied vol? (pls guide where should i start with?)
and let say USDJPY (say forward ref is ...
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Variance replication using options
I would like to understand the intuition behind the following question:
Why a certain weighted sum of prices of put and calls is equivalent to the implied variance of an underlying?
A variance swap ...
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Why does volatility increase the expense of delta-hedging?
Consider someone that writes a call, and wishes to delta-hedge against it to remain delta neutral. For this to be profitable, the price they sell this option for should be greater than or equal to the ...
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Asymptotic behavior of implied volatility at probability mass [closed]
For sake of simplicity, let us suppose that interest rate is zero, stock price is 1, and time to expiry is 1. I am interested in implied volatility that gives the following put price.
$$P(k, \sigma(k))...
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Filtering options data
I am looking to conduct some analytics with regards to options implied volatility. My advisor mentioned about filtering options with time to maturity of less than 7 calendar days. Is there a ...
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Value of Call Option as Volatility goes to Infinity
Why would the value of a call option go infinity as volatility goes to infinity?
I understand how you could solve this question by taking $\sigma \rightarrow \infty$ in the solution to the black ...
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Smile wings and varswap pricing
Is it true that far wings of the volatility smile have an outsized influence on the price of a variance swap? Is there a mathematical argument demonstrating this idea? What do we generally refer as ...
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Strike of a Variance Swap in a Sticky Strike World
Imagine there exists a typical negative skew for some underlying I want to price a variance swap on. Critically, let’s say we are in a sticky strike world (the vols of each strike will not change with ...
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Why is Implied Volatility more important than skew for put spread pricing?
It is said on page 26 of the book "Trading Volatility: Trading Volatility, Correlation, Term Structure and Skew" by Bennett (2014) that:
A rule of thumb is that the value of the OTM put ...
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Downward-sloping volatility skew in equity prices
I’m learning the market price for FRM, and I’m having a hard time understand a question in the assessment:
From my understanding, the volatility skew for equity is the graph on the right upper corner:...
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Black-Scholes implied volatility using a GARCH model
Why I'm not getting the same Black-Scholes implied volatility values as the ones given in the paper "Asset pricing with second-order Esscher transforms" (2012) by Monfort and Pegoraro?
The ...
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implied-information in american option
I have recently been researching European options versus American options implied information. For European options, an overview article is Christoffersen(2012). But for American options, I only found ...
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Drift of stochastic variance as slope of the short end of the forward variance curve
I was re-reading Chapter 6 of Stochastic Volatility Modeling by Lorenzo Bergomi. On page 203, he considers a forward variance of the following form:
$$
d\xi_t^T=\lambda_t^T dZ_t^T,
$$
where $Z_t^T$ ...
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Is negative forward variance an arbitrage?
I believe that having a negative forward variance on a ATMF implied volatility curve of a volatility surface could imply the existence of a static arbitrage (for example, a calendar arbitrage). ...
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The little Heston Trap in DPS representation
I was wondering if the representation by Duffie, Pan, and Singleton (2000) is already accounting for the little Heston trap. DPS represent their 'general' discounted characteristic function as:
$$
\...
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Implied Volatility Discrepancy in American Options - Mathematical Reasoning?
I've been analyzing Tesla stock American options data and have observed an interesting pattern that I'd appreciate some help understanding.
For this analysis, I obtained the Implied Volatilities (IVs) ...
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question on risk reversal P/L example in Euan Sinclair's book 'positional option trading'
I am reading Euan's book, ‘positional option trading’ and have a question about risk reversal P/L example. Here is description 'Consider a 1-month risk reversal on a \$100 stock. The 20-delta put (91 ...
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Closed form solution to get implied vol from delta with SABR model
Given a set of calibrated SABR parameters, what is the approach to get the implied vol for a given delta ?
thanks
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From model vega matrix to market vega matrix
I'm reading Antonie Savine's fascinating book Modern Computational Finance AAD and Parallel Simulations. However, I got a bit confused while reading and couldn't make sense of how it works in his work....
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Implied Volatility Surface Interpolation for fixed moneyness and maturity on each day of the calendar
I'm new to quantitative finance and interested in performing a PCA on the implied volatility surface. However, my dataset displays certain point changes over time. As a result, I need to interpolate ...
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What are popular metrics for Option Skew?
What are popular metrics to track skew? Would it be the difference between OTM option and ATM option IV? Would it be a percentage difference in IV?
Also, if both are valid, would a % change be ...
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interest rate, dividend rate data for black scholes model [duplicate]
I am working on a project to build an implied volatility curve for SPX options. But I am stuck with finding interest rate and dividend rate data for all maturities. Any recommended resources?
Thanks!
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How to structure a trade using vanilla equity options to get vega exposure to forward volatility?
I have been thinking about structuring a trade to get exposure to the forward volatility. For example, let's say SPY ATM 1 month IV is 20 vol and SPY ATM 2 month volatility is 30 vol. Then the forward ...
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Questions on limitations of local volatility model
I am currently studying local volatility for equity models and I am trying to understand some limitations of the model:
1.
under local volatility, the forward smile gets flatter and higher.
Lorenzo ...
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Good resources about Volatility Calibration with code Snippet
As I just landed in the quantitative finance world, I would like to dig deeper into Volatility Surfaces construction.
I have a good theoritical background ( I'm familiar with volatility models ) but I'...
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Is Nassim Taleb wrong about his DdeltaDvol dynamics in his Dynamic Hedging book?
if you're long OTM calls, an increase in vol would increase your delta (converges to ATM) and if you're long ITM calls, increase in vol would decrease your delta (converges to ATM as well). So OTM ...
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Pricing and Risk Management of Exotic Options with a Volatility Surface [duplicate]
Bit of a newbie question; but I see this pop up from time to time.
If we have a volatility surface (e.g. for the S&P500) built from market options what more can we do with it, but price other ...
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In-depth derivation of implied volatility in the SABR model
I'm working through the derivation of Hagan's formula (Hagan et al, 2002) for the implied volatility of an option in the SABR model. I'm finding it pretty confusing. Most of my hang-ups are coming ...
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STOXX50 and VSTOXX joint calibration
I am currently researching the joint calibration problem of SPX and VIX. The idea is that: VIX options are derivatives on the VIX, which itself is derived from SPX options and should thus be able to ...
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Is there anyway to compute the CEV-implied volatility from option prices?
Under Black-Scholes, there exists a solution for the option price for a volatility. The volatility can then be backed out from the option price using numeric methods.
For the constant-elasticity of ...
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Does skew flatten with a decline in volatility?
In Trading Volatility by Bennett, he says:
If there is a sudden decline in equity markets, it is reasonable to
assume realised volatility will jump to a level in line with the peak
of realised ...
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what does correlation $\rho$ means in surface SVI?
Why does everyone say $\rho$ is correlation in Surface SVI?
$w = \frac{\theta_t}{2}(1+\rho\psi(\theta_t)k + \sqrt{(\psi(\theta_t)k+\rho)^2+1-\rho^2})$, with $\rho \in [-1,1]$
This paper says it is ...
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What is the implied volatility skew?
I often hear people talking about the skew of the volatility surface, model, etc... but it appears to me that there isn't a clear standard definition unanimously used by practitioners.
So here is my ...
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What is the Fair Strike in a Var/Vol Swap and how does it relate to its price? [closed]
I am a student trying to price volatility and variance swaps.
People who price those two products usually try to get the "fair strike", and don't seem to care about the price.
However, I ...
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Popular treasury futures bond options volatility surface model/s
I am looking for volatility surface parametrisation model used for treasury futures bond options. I know that most popular for options on equities its SVI, on FX its Vanna-Volga, on rates its SABR. ...
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Options skew: when is a perfect fit desirable?
I'm still troubled by a rather basic question, namely when is a perfect fit to the vanilla skew really necessary?
I think if you are trading vanilla options and/or Europeans that can in theory be ...
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How to interpolate volatility's skew using spline in Python
I have two lists to describe the function y(x) that represents strikes and the relative value of the skew of a volatility surface:
...
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How are SOFR implied vols calculated? Are they normal or log normal?
How are SOFR implied vols calculated? Are they normal or log normal?
When we are pricing options with black-76 model, implied volatility must be log-normal as black model assumes log normal ...
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Is variance swap long volatility of volatility?
In JPM's note on variance swaps, on page 29, they say "... a long variance swap is also long volatility of volatility".
In Bennett's book Trading Volatility, on page 115, he says "... a ...
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Different volatility surface ( Local vol, Stochastic vol etc.)
Despite many questions about local and stochastic volatility available on this forum, i still have a few doubts left. Essentially I am seeking validation whether I am interpreting things correctly.
...
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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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Stochastic volatility with jumps [closed]
I'm reading the Duffie, Pan, and Singleton (2000) paper now and I've stumbled upon something that seems to me as an inconsistency. Whenever I look up the SVJJ model, I see that its log-transform is ...
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Working with wide bid ask spreads in option pricing model
I'm trying to fit an Heston model to market data. But market is data has some terms (<3M) with quite wide bid-ask spreads (12%-25%). Should I just use mid volatility? Is there maybe a model to pre-...
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Different Exercise Style Options on Same Underlying
Some equities on European markets have options traded in two different exercise styles: American and European.
Examples:
ABB and ABB (european) on Eurex
Banco Santander on MEFF
Consider ...
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Forward price of dividend paying asset and IV skew asymptotics as $T\to\infty$
Assuming for simplicity deterministic interest rate and dividend yield, then the forward price of an asset is
$$
F = Se^{(r-q)T}
$$
where $T$ is maturity date.
In studying IV skew asymptotics, the ...
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Bloomberg field name to get implied volatility of options
I am trying to get option data from bloomberg api. I got the all available options on a given underlying eg:"ASML NA" and Field "PX_LAST" gave the last traded price for each option....
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How do market-makers profit & manage inventory when customers sell a lot of deep OTM options?
In a live example: Today is June 14, 1 hour before market close, and \$SPY (S&P 500 ETF) is currently at \$372.28 and the June 15 \$350 strike Put is being quoted for \$0.13 on the bid and \$0.14 ...
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Why does the volatility smile flatten as maturities increase?
First, I can't find a purely "financial" explanation for this.
Also the only mathematical explanation I've found so far was using the large deviations theory, which is quite complex.
Is there a ...
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Implied volatility extrapolate to longer maturities
So we are looking at some security names with limited amount of listed options. Some of them only have listed options that expire in less than a year. Is there a quick way to extrapolate the vol ...
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Volatility swaps hedging
I have heard that traders use a straddle to hedge volatility swaps (in the FX context), although I could not figure out the specifics. Is this type of hedge used in practice? And if yes, how does it ...
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