1
$\begingroup$

Is there a practical method to calculate some sort of average IV for each level of moneyness of equity options?

I'm thinking of an algorithm to find mispriced options and do to so, we need to figure out what is the expected IV depending on the moneyness of the option.

$\endgroup$
2
  • $\begingroup$ Thank you @noob2. I know that average IV isn't good, especially if we want to calculate it using historical data since the underlying most probably have already moved. I'm looking for some sort of measure similar to what used as mean as I'm hypothesising that IV should revert to some sort of average if it priced correctly. $\endgroup$
    – Mehdi Zare
    Feb 5, 2020 at 13:23
  • $\begingroup$ It's like expected value and mean, right? We expect the realized mean to be the expected mean we calculated beforehand. We input market price and get the IV, we can also input historical market prices and get the volatility at that time. What's the different? I'm not implying to use historical underlying price, but using historical option prices. $\endgroup$
    – Mehdi Zare
    Feb 5, 2020 at 13:41

2 Answers 2

0
$\begingroup$

I am going to give you a basic idea as how to go about it, as I have not thought much on this. But you could the delta space, convert all options into their deltas, this will take care of both spot changes and time passing.If you are looking to model various expiries, some weighted measure should be introduced (I have no idea how, but check out weighted vega)

$\endgroup$
0
$\begingroup$

I did some work with IV before, but am not an IV expert. Usually mispriced options are the ones that are less liquid i.e. ITM options (but usually not ATM or OTM). You could probably try to filter for liquid options using their bid-ask spreads, open interest etc. and use a cubic spline to extrapolate an IV skew. Then, you would have an "expected" IV based on the skew vs the actual IV from the markets.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.