I am trying to calculate the implied volatility of an underlying given observed prices of call and puts. There are two scenarios:
- The ATM strike is pinned by the market (i.e. underlying level == strike price)
- The price of the underlying lies between two strikes
I have the following questions:
- How to combine the implied vols for same strike calls and puts
- How to interpolate between iVols for two strikes
- How to interpolate between iVols for calls and puts accross two strikes (Combination of 1 and 2 above)
Note: For the sake of simplicity, I'll assume that the options are European style, and I am using the BSM to backout the ivols.
I have changed the title to reflect the fact that it is a SINGLE (i.e. composite) value that I want to determine from the set of previously calculated IVols. Put simply, I want to know what is the most appropriate weighting scheme to apply, given the scenarios described above.