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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48 views

Vega vs Gamma. Implied vs realized vol

I was reading the answers to this question: Long Gamma vs Vega , but I still I feel I am missing a bit of context. Let's say I am long an European call today. From the plots shown in the second ...
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Interpolation implied volatility put pricing

My goal is to price a put (for exemple with maturity = 0,5 and K(strike price)=250 S(asset price)=247,74 and r=1,11%) through B&S formula. I know that I have to choose a value for implied ...
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How can I extrapolate a Smile curve of Maturity T for a longer maturity T+1>T

I have a interpolated vol smile curve for maturity 2 years and I would like to extrapolate it to a 5 years.
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Average daily move from implied volatility of risk reversal

I'm trying to understand an example in Euan Sinclair's Option Trading book. On page 239 he gives a risk slide and pnl from a long 30 delta put short 30 delta call position. He says the implied ...
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Calculating very near-term implied volatility

i re-calculated the implied vols feed by my broker (ThinkorSwim) and found that my near-term vols (expiries within the next 7 days or so) are much higher than the ones from ThinkorSwim. How can that ...
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Implied volatility and greeks of options

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? ...
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Are there any books/articles on how to use options to be long volatility (implied or realized)? [duplicate]

Given the market turmoil of late I have become fixated with this idea of using options to be long volatility (realised and implied). However, I dont know where to start, what to read, who to follow ...
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When Fitting Implied Vol in, implied vol=ax²+bx+c, why is better to use moneyness than delta as independent variable?

I am trying to construct a smile curve using Option data, I can either interpolate implied vol vs delta or implied vol vs moneyness.
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Connecting the dots: Black Scholes, Volatility and Implied Volatility

I am a first year Management & Finance undergrad preparing for my second year Finance courses, given that term 3 and exams have pretty much been cancelled for all British first years. During that ...
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How are VIX futures being priced when the VIX itself is not being calculated because of circuit breakers

I see that CBOE has halted trading all SPX options, which means the VIX cannot be calculated. Yet VIX futures are still trading and we are very close to the last trade date for the March contract. I ...
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ATM volatility for FX options

I am quite familiar with equity implied volatility and smiles. However, I find it quite confusing and unclear when it comes to FX. I read many materials but could not get a grasp of the notion of ATM ...
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Option Volatility Smile vs Delta

I am new to options trading and have been trying to better understand the relationship between implied volatility, delta, and moneyness. I was wondering how a call option's implied volatility can go ...
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Why SVI does not fit well short-maturity options?

As I understood, the SVI is widely used among practitioners. However, it is mentioned in many published papers (including ones written by Gatheral), that the SVI model does not fit well short-maturity ...
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For any twice differential continuous function C(T, K), does there exist a sigma(t, S) that can reproduce C(T, K)?

In the Dupire's paper, he assumes that there exits a function $\sigma(t,S)$ that can reproduce $C(T, K)$. My question is that: is the assumption true for any twice differential continuous function $C(...
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243 views

How does volatility skew change with underlying spot?

We know that generally ATM implied vol is negatively correlated with the underlying spot for equity indices, i.e. implied vol goes up when spot moves down. Therefore I wonder if there are any ...
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Is Dupire's local volatility model path independent to recover historical option price?

Generally when we implement Dupire's local volatility model, we follow the steps below: Calculate implied volatility from given historical data Fit the implied volatility skew. So we also know the ...
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68 views

Conditions for implied volatility to attain a minimum value

Suppose $$ dS = \sigma S dW $$ and $$ d\sigma = a(\sigma,t) dt + b (\sigma,t) dZ $$ with $dW dZ = \rho dt$. What are the conditions necessary such that the implied volatility skew of vanilla ...
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Why does a Bermudan option have a higher implied volatility than its European counterpart?

I get that the premium for an earlier exercise should be higher to compensate the seller but intuitively you would think that the spot has "less room to run" in a potentially shorter period of time (...
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Vol surface fitting with 5 degrees of freedom

For an options market making operation I need to be able to build a volatility surface, based on only 5 degrees of freedom, like e.g.: MaxPut, MaxCall, Skew, Curve and At The Money Vol. Is there an ...
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84 views

Implied volatility for puts vs calls [duplicate]

I was trying to create a replication portfolio of options for a Variance Swap and noticed that there is a jump when moving from below strike puts to above strike calls. Something similar to this: I ...
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On which model is based the Finite Differences method for implied volatility computations?

I am very new to finance, so I don't know if my question makes sense but I have seen that there are different methods to estimate the implied volatility of an American Option. One of them is the ...
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Hagan et. al original argument for SABR

In the original SABR paper (Hagan et al 2002 ), the introduction of the famous model is motivated by the observation that local volatility models spot dynamics work the wrong way. As the spot ...
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61 views

How to project 1 Year ATM Implied volatility for SPX 500 1Year from now? Final goal is to calculate 1 Year Call prices on SPX 500 1 year from now?

I have the historical data for 1Year ATM Implied Volatility on SPX 500. I want to simulate the 1 year call option prices 1 year from now. What methods and approaches do I need to use? (Heston,GARCH, ...
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Practical approach to get average option IV

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 ...
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Implied/Realised Vol ratio for negative rates?

I'm trying to calculate the implied vs realised vol ratio for different swaptions across major currencies. This works fine for the likes of USD and GBP as rates are positive. However I'm struggling ...
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Hedging with implied volatility

I am reading this article by R. Ahmad and P. Wilmott: Which Free Lunch Would You Like Today, Sir?: Delta Hedging, Volatility Arbitrage and Optimal Portfolios Let $V^{i}$ the market value of an ...
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Volatility time weights calculation

I. Clark introduces the concept of volatility time in Foreign Exchange Option Pricing under which the implied volatility should be interpolated in time with the formula below: where w is a weight ...
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Computing implied volatilities of ITM and OTM options

For an ATM call the implied volatility can be computed by using the Newton-Raphson method: ...
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How to find the volatility indices corresponding to equity indices?

I have a list of equity indices that I got through Eikon API (with Python). I successfully got their time series but at this point I would need the corresponding implied volatility, which is not ...
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199 views

Question on Realized Vol vs Implied Vol

I have heard the following argument- barring transaction fees, if my estimation of future realized vol is 30% and 1-month ATM implied vol is 20%, then I could potentially buy a 1-month ATM call/put ...
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109 views

To use daily volatility or annual volatility

From Joshi's Quant Interviews books: The statistics department from our tell you that the stock price has followed a mean reversion process for the last 10 years, with annual volatility 10% and ...
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168 views

What is the connection between the risk neutral implied density and the real world density?

I understand that we can use option prices to imply volatilities and ultimately to imply a risk neutral density. I also understand that this implied density is not the same as the "real world density"....
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Instability in risks using local volatility

I am valuing vanilla call options using FDM with Crank Nicolson discretization and Rannacher smoothing (mind you, I am having the same issue on MC) and I am getting unstable delta, gamma and theta. I ...
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Robust bounds or approximations on implied volatility skew when $\lvert \rho \rvert \rightarrow 1$

Are there any robust / non-parametric results for pure stochastic volatility models, in terms of bounds or preferably accurate approximation, for the implied volatility skew $\partial IV(k) / \partial ...
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Calculating Implied ATM Volatility with Vega

Can we calculate Implied ATM volatility with Vega? Normally, Vega is derived from Volatility, but I wonder the availability of the opposite way.
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Since implied volatility is the standard deviation of returns, why do people treat it as the standard deviation of the price process?

In the Black Scholes framework, the parameter sigma (volatility) is the standard deviation of the underlying's returns NOT the standard deviation of the underlying price process. But I often see when ...
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66 views

calibration - negative call price [closed]

Im trying to calibrate a stochastic volatility model to market. I end with an MSE of 2-3 with approximately 500 quotes. Some out of the money options with call-price under 1 dollar ends up being ...
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In building volatility curve for etf options, should I use synthetic forward price or cash price

Assuming option market moves faster than ETF cash price in intraday high frequency setting. That means at each time point, when implied volatility is calculated by black-schole model by using cash ETF ...
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71 views

Should we calculate the implied volatility surface with Put+Call?

We have Sungard data (MarketPlace8), but for nearby maturities the ask-bid of the calls are all the same when we are out of the money (call), so should we calculate the implied volatilities of calls ...
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286 views

Intuitive explanation for the smile in FX

What is the intuitive reason for the smile in FX? For equities this usually down to crash risk.
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130 views

Measuring implied volatility

I'm a new in financial engeneering and trying to understand basic principles of volatility modelling. I wrote many papers and articles about different models (garch, local vol, stoch vol and ect.) and ...
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Why does implied volatility increase when we lower the risk-free interest rate?

I don't understand it, when I calculate it I see it, but I can't explain it. Plus, $\frac{\partial C}{\partial \sigma}$ is positive so, could you explain me please ? Is it because the market is more ...
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What is the point of volatility curve fitting?

What is the point of fitting curves to the implied smile in the market? (Other than pricing exotics where the hedging instruments are vanillas). How does fitting a vol curve help you trade/market make ...
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FX Volatility surface bid/ask

I have bid/ask vols (straddles, risk-reversals and market strangles) for FX pairs, I want to create a mid/bid/ask volatility surface in strike/maturity space after a consistent smile calibration ...
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86 views

Downward-sloping volatility skew in equity prices

I’m learning the market price for FRM, and I’m having a hard time understand a question in the assessment: From my understanding, the volatility skew for equity is the graph on the right upper corner:...
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112 views

How many options would be required to dynamically replicate the VIX nowadays?

The VIX is a portfolio of OTM options on the SPX with non-zero quotes. From CBOE white-paper: Only SPX options quoted with non-zero bid prices are used in the VIX Index calculation. [...] As ...
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220 views

Deriving implied volatility programmatically

I'm working on a project to calculate the value of options using Python. I'm using the Black-Scholes model, and I can get accurate results by plugging in a given ...
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177 views

Different volatility surface ( Local vol, Stochastic vol etc.)

Despite many questions about local and stochastic volatility available on this forum, i still have a few doubts left. Essentially I am seeking validation whether I am interpreting things correctly. ...
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Intraday and Intra-Week Pattern of Implied Volatility in FX market

Q1. How does implied vol changes from market opening time to market close time? I have read that it decreases during the day i.e. it opens high and closes low. what is intuitive and mathematical ...
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Relation between Implied and Historical Volatility of GBPUSD and USDGBP

Q1. How is the implied volatility of GBPUSD and USDGBP related to each other mathematically? Please explain this intuitively as well. Q2. How is the historical volatility of GBPUSD and USDGBP ...

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