When we are calculating deltas or vegas for different strikes should we use the underlying asset's volatility or should we use the implied volatility for the specific strikes at a fixed maturity?

Is there a book or blog where I can learn about the actual models used in option backtesting or trading platforms( in R / python) instead of the normal theoretical ones ?


1 Answer 1


Re your first question: Use the implied volatility $\sigma_{imp}(X,\tau)$ for strike $X$ and expiry $\tau$.

The option price, and hence the implied volatility, is driven by the options markets. Your option model should first and foremost be able to replicate observed option prices (hence, you plug in implied vols).


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