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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 suggestion as to where to find more information would help too thanks.

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    $\begingroup$ An example would help. But probably SVI. $\endgroup$
    – Quantuple
    May 19, 2016 at 21:15
  • $\begingroup$ I'd you can give us an example of a smile (preferably a horrible one, as this is where the models tend to differ) then we miggt be able to tell you what parameterization they're using (if it's a standard one). $\endgroup$
    – will
    Jun 19, 2016 at 23:08
  • $\begingroup$ I assume you can at least contact them and find out. But if they are not willing to share their model name (which is not very likely), then you can probably guess by looking at a couple of features: near expiration fit, vol skew term structure, etc. SVI is not a model by the way. It's a parametrization and not arbitrage-free. SSVI sounds a bit more sophisticated for a large bank $\endgroup$
    – Will Gu
    Dec 16, 2016 at 5:54
  • $\begingroup$ Also what type of security are you looking at? There's a difference between trade-driven and quote-driven. I assume the IV comes from traded price of options. $\endgroup$
    – Will Gu
    Dec 16, 2016 at 6:38
  • $\begingroup$ @WillGu Why do you say SSVI is a bit more sophisticated for a large bacnk? $\endgroup$
    – will
    Jan 15, 2017 at 22:37

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Not sure what they use in Thinkorswim but I would assume some variation of a Cubic Spline, taking points along the skew and interpolating between them.

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  • $\begingroup$ Why do you pressume a cubic spline? $\endgroup$
    – will
    Jun 19, 2016 at 23:06
  • $\begingroup$ Just because it is used in many places for volatility skews in other markets. True there is nothing to say it has to be a cubic spline. I just meant to say that it is one way of going about it. $\endgroup$
    – glaucoOptions
    Jun 25, 2016 at 17:34
  • $\begingroup$ I guess it depends how many points you have. If you have a lot it doesn't matter how you interpolate. If you have few few you need a model to fit and interpolate with. $\endgroup$
    – will
    Jun 27, 2016 at 20:39
  • $\begingroup$ I only hear about using Cubic Spline in FX option implied vols, since they are mostly trading 10 and 25 vol options. For equity options, how could you used cubic spline if there's no data for deep in/out-of-the-money option prices? $\endgroup$
    – Will Gu
    Dec 16, 2016 at 6:40

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