I am looking into pricing FX options using the Vanna Volga method. I am aware of the commonly referenced shortcomings of this approach and the superiority of SLV, still it is something I want to do.

All of the sources I have come across on the Vanna-Volga indicate that the VV adjustment is based on three strikes: 25d Put, ATM, 25d Call. The somewhat obvious problem is incorporating the 10-delta prices that are also quoted in the market. In one of the more popular papers on vanna-volga (Castagna, Antonio & Mercurio, Fabio. (2007). The Vanna-Volga method for implied volatilities. Risk. 106-111.) this doesn't seem to be a problem as the 10-delta qutoed volatilities match nicely with the ones given by the VV adjustment based on 25d and ATM prices. I would believe however this may not always be the case. This answer on QF claims that

you can't match the 10 delta wings without some weird contortions

however I'm wondering just how much complexity does that introduce. My intuitive approach with interpolating volatilities outside the 25d Put - 25d Call range would be to try and neutralize Vega, Vanna and Volga using 10d, 25d and ATM options. As an example, a VV adjustment on a 15d call would be based on ATM, 25d Call and 10d Call rather than 25d Put, ATM and 25d Call. In case of a strong skew this would seem to make more sense than using the much more "distant" 25d Put vols.

I have not yet tried any implementation of such an approach so I'm not saying this is straightforward, it's just that I don't see any immediate roadblocks when thinking about it.

Has anyone tried such an approach? Is there something I'm missing?

Thank you



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