Questions tagged [implied-volatility]

The volatility of the price of the underlying security that is implied by the market price of an option based on an option pricing model.

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19 views

Implied vol vs Realised vol on Event Days

How implied vol varies vis-a-vis realised vol on an event days?
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50 views

What model do market makers in equity derivatives commonly use to price, hedge, and fit the IV surface?

What is the industry standard/common model used by market makers in equity derivatives to trade across the IV surface?
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54 views

Local volatility and Stochastic Volatility

Please help me understand similarity and differences between local volatility and Stochastic Volatility both intuitively and mathematically.
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70 views

Why is the SVI parameterization in terms of variance?

The Gatheral SVI parameterization reads $$\sigma^2 = a + b \left[\rho(k-m) + \sqrt{(k-m)^2+s^2}\right]\,.$$ Why is it expressed in terms of variance $\sigma^2$ and not directly in terms of volatility $...
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60 views

What is the intuition behind “jumps” causing volatility skew?

Some models use jumps as a way to explain volatility skew. I understand that if jumps exist, then you are "mishedged" as you no longer can continuously hedge. Options have a gamma component and ...
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32 views

What are popular metrics for Option Skew?

What are popular metrics to track skew? Would it be the difference between OTM option and ATM option IV? Would it be a percentage difference in IV? Also, if both are valid, would a % change be ...
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How to shock the IV surface w.r.t VIX and keep AOA

I have to compute the sensitivity of a set of option prices on a single sotck (range of tenor is over the whole surface) to an increase of 100% in the VIX.. and I am trying to get to the most ...
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58 views

Arbitrage-free IV surface definition vs. real arbitrage process

In the context of BS implied volatility surface fitting. In the literature, it seems that conditions for arbitrage are defined in a way that assumes that options can be traded at the same price for ...
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What is the best method to factoring/calculating pre and post event volatility? Such as for company earnings

What is the best method to factoring/calculating pre and post event volatility? Such as for company earnings.
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68 views

Use cases for calibrated IV surfaces

What are common applications of a calibrated options IV surface when trading vanilla options only? Thank you!
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How To Calculate The Implied One Day Expected Return For Earnings

I am trying to figure out how to calculate the one day expected return given I have the event volatility. In his book Trading Volatility, Correlation, Term Structure and Skew, Collin Bennet (link) ...
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44 views

Local volatility Formula and How To use it

I'm new to Volatility Modelling, so the content of this question may be completely wrong and th question naive. I'm reading "The volatility surface" by Gatheral. I'm trying to get a sense of the first ...
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214 views

Why is volatility skew/smile for long term options flatter compare to short term options?

Volatility skew/smile for long term options is flatter compared to short term options, could someone help to explain why is that the case? Thanks
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215 views

Options Market Making Used Implied Volatility Surface

Suppose you are a market maker with a model that is producing an implied volatility surface for you. Suppose you quote bid/ask prices (vols) around the prices given by your implied vol surface. In ...
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65 views

Why and how is Implied volatility directly related to stock price but inversely related to strike price?

I know that in equity markets there is a volatility smirk which results in higher IV for lower strike price options because of crashophobia and leverage related factors but I can't wrap my head around ...
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32 views

Procedure of model calibration

Say that your end goal is to price an equity exotic derivative under both Heston and the local volatility models (Black Scholes model with vola dependent on strike and underlying level). Do the ...
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1answer
62 views

B-splines: convexity in IV/Price

I see that the justification of the need to use cubic B-splines when interpolating in the strike-IV space is to impose a convexity constraint to get rid of potential arbitrage. I could easily ...
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47 views

Implied Risk Neutral Density Doesn't Integrate to Unity

There is a well known result that $\frac{\partial^2 c(K)}{\partial K^2}= e^{-rT}f(K)$, where $K$ is the strike and $f$ is the risk neutral density at time $T$. With the left calculated from market ...
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Vol surface fitting to options on commodity futures

Trying to fit variants of SVI (Zeliade method, SSVI etc) to options on futures price data. One of the core ideas of the SVI parameterization is the absence of calendar spread arbitrage. I think the ...
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How to derive the half slope rule from asymptotic relation between implied and local volatility?

In their paper(https://www.sciencedirect.com/science/article/pii/S0764444200017493) BERESTYCKI, BUSCA, and FLORENT proved an asymptotical relation(for short maturity) between implied and local ...
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114 views

Why do we fit volatility surfaces implied from a option pricing model to the empirical data?

As far as I understand volatility surface. It is made of 2 components, the volatility skew/smile and the volatility term structure. Together they form something like Implied volatility is ...
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Procedure/methodology for building equity volatility surface

EDIT: I update while making progress: I am trying to build (model implied) volatility surfaces for individual equities. I will use these surfaces to calibrate models to price different derivatives (...
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30 views

Dimension reduction for worst of basket on $min(S_1, S_2)$

Suppose we want to price an exotic equity which is a function of $min(S_1, S_2)$. To do this, I'm trying to compute an implied volatility surface for $min(S_1, S_2)$ and then price the option using ...
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76 views

Black Sholes option pricing with all but Delta [closed]

I'm trying to setup a little option pricing model in excel. I have all the information for the inputs (interest rate, IVs for different deltas, time to expiry, strike price, underlying price) but what ...
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Does convexity in the IV space means convexity in the price space?

Let's assume that we only look at OTM options to construct a Risk Neutral Density (RND). As the RND is the second derivative of the price of the option with respect to the strike, we would expect ...
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133 views

Why do coefficients flip after the including a lag in the optimisation? implied volatility/skewness/ivspreads

I'm hoping some of you guys can help me out. I am applying the paramametric portfolio optimisation of Brandt, Michael W., Pedro Santa-Clara, and Rossen Valkanov. in which the weights on specific ...
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115 views

How does the volatility skew/smile relate to hedging/trading vanilla contracts?

I know that obtaining and calibrating the smile is important in the hedging and trading of exotics since we use vanillas to hedge and price exotics. How is the smile important in the hedging and ...
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48 views

looking for a simple realistic parametric volatility model

Which parametric volatility is realistic to test quickly and qualitatively a model? I do not wish to fit market quotes but would like to have a non-trivial volatility with skew or smile to do some MC ...
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106 views

Question about volatility surfaces

As a learner, I'm curious to know the answer to 2 questions regarding volatility surfaces 1) It's stated that volatility surface should be flat accdording to Black-Scholes model. Why is that? Time (...
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25 views

Arbitrage bounds on volatility of price of binary option?

What are the arbitrage bounds on the volatility of the price of a binary option? If the binary price moves too much (such that it violates the arbitrage bounds) what trades would you actually execute ...
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How do I export data from the volatility lab?

I am trying to export data from the volatility lab within the interactive brokers TWS platform. Specifically, I am interested in implied volatility and historical volatility for specific tickers. ...
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63 views

Finding Jump Probability For Time Series Data

I'm relatively new here, so if it seems like I'm asking a bad question, go easy on me. So I was looking at the Merton Jump Diffusion Stochastic Model on Turing Finance's article. Instead of creating ...
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39 views

Why does nasdaq.com have such high Put IVs?

For the following monthly puts, nasdaq.com has very high IVs: WHR Sep 115 Put: 54.51% WDC Sep 42.5 Put: 66.94% When I run the above through http://www.option-...
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Anyone know if this daily report discontinue to publish? Goldman Sachs - “Global Index Volatility and Correlation Monitor”

I used to receive this daily report in my workplace from Goldman Sachs mailing list but the mailing list discontinued in May 2019 without any notice. The report is an pdf attachment which send from "...
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140 views

Implied volatility equality for deep in/out-of-the-money put and call

Someone posed the following question. Given a strike $K$ and the stock price $S$ and the same maturity are the implied volatilities of the call and put with these same parameters equal for $|S-K|\gg0$...
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82 views

Is it possible to compute implied returns from volatility?

If we assume that, broadly speaking: Assets in liquid markets are fairly priced to its value Volatility is predictable (volatility clustering, GARCH, etc) Investors are rewarded and earn a return for ...
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57 views

The error term of Hagan's approximation of Black's vol in SABR

Hagans approximation of Black's implied vol in SABR is very! difficult to understand fully. But I want to ask in here if anyone can tell me more about the error term. Consider the paper: http://web....
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89 views

SABR Implied Vol: Normal Approximation vs Log-Normal Approximation

I am having trouble understanding the difference between the normal and log-normal implied volatilities from Hagans SABR model: http://web.math.ku.dk/~rolf/SABR.pdf. As far as i understand the main ...
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197 views

Local Volatility with Monte Carlo Simulation

I am trying to implement a Monte Carlo Simulation using Local Volatility Model (Dupire’s Equation). I’m pretty sure I can build a very good LV surface, however, I do not know how to use it in the MC ...
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Intuition behind Implied Volatility Surface

When looking at an implied volatility surface, are there some intuitive conclusions that one can draw from the shape? E.g. the steepness of the wings, the skew etc? If one for example compares two ...
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85 views

Compute implied volatility surface of a put option from a call option

Suppose the function double bsCall(double S0, const double &K, double T, double r, double sigma) computes analytically the Black-Scholes price of a call option ...
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Implied volatility of Treasury options

For practitioners, does the concept of implied volatility also apply to (European) Treasury Options (whose underlying is Treasury Futures contracts)? For the standard individual stock vanilla ...
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Interpolation of SVI Implied Volatility in parameter space

I am currently working with a slice-wise SVI parametrisation of the implied volatility surface. $\sigma^2(x,t) = a_t + b_t (\rho_t (x - m_t) + \sqrt{(x - m_t)^2 + \theta^2})$ Does anyone have ...
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68 views

What is the cause of a “broken” volatility surface?

I am currently working on a project for which I need the implied volatility surfaces, to estimate the value of plain-vanilla European options with different strikes (cannot be observed directly in the ...
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Measuring implied move priced into an event

It's well known that options price in an expected move in the underlying going into events, such as earnings announcements. I currently measure this implied move by computing the forward variance ...
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Is the implied volatility surface relative or stationary?

Do different strike values of options attain their volatility value dependent on their % distance from the ATM price continuously, or is the volatility surface stationary during a single day?
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162 views

What is upper left vol?

First time question, so please let me know if you have feedback for how I am asking. I am reading a market research piece and it makes reference to the performance of "vol, particularly the upper ...
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79 views

Practical Skew Model For Equity Options?

I'm looking for a simple model I can use to calibrate equity implied volatility surface. There are several models published in the literature, and most of them seem far too sophisticated for my ...
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189 views

Is there a method to interpolate the volatility smile?

I have a small question of interest. During my classes at the university I have learned about the Nelson-Siegel method to fit interest rate curves. With this method you are able to determine interest ...
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Gatheral's SVI implementation in Java/Scala

I am trying to fit equity option implied vols using SVI model in Java, and I am using apache math commons library. Some of the option expiries fit very well, but others are completely off, and I am ...