All Questions
104 questions
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How to derive the volatility of options PL (hedged) as a function of implied volatility and measured realized volatility
This is my first time asking a questions. Apologies in advance if I mess something up. If this happens, please let me know if I do and I'll try to fix it.
My question is regarding the equation Euan ...
- 1
2
votes
3
answers
211
views
Option Prices less than intrinsic value with Implied Volatility Solver
I have recently received a dataset with SPX options.
I tried solving for implied volatilities using a root solver. I noticed errors consistently popping up that is solvable via the answer given below:
...
- 2,231
2
votes
1
answer
105
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How to reconstruct the vol surface given Level, Slope and Curvature
Assuming I have a prediction of Realized Vol, Skewness (Slope) and Kurtosis (Curvature) of the underlying of an Equity European option.
How to get IV(log(S/K)) at any point on the curve as a function ...
- 108
3
votes
0
answers
90
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An approximate lower bound for options on variance
Question:
I am wondering if anybody has looked at the following lower bound, based on the most-likely path approximation, and/or tested it?
Let $dS_t = \sigma_t S_t dW_t$, where $\sigma_t$ is a ...
- 2,681
1
vote
1
answer
184
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Long vs Short Volatility Skew
This question is purely on the structure or maybe even jargon of being long or short volatility skew. Realistically, we do know that when we are long skew, we are long an OTM put and short an OTM call,...
- 155
2
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0
answers
99
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Modelling the relationship between the Implied and the Realized Volatility [closed]
I am trying to statistically model the relationship between implied volatility of European ATM options (expiring in 1 month) and the realized volatility of the underlying.
I am interested in the ...
- 131
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42
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Interpretation of first and second moments of Risk Neutral Densities for AMD
Suppose I have correctly computed the option-implied risk neutral density for AMD options expiring in exactly 1 week, and discounted this expectation with the correct risk free rate, using the Breden ...
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35
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Do bias adjustments make sense in the context of measuring realized volatility to compare to implied volatillity?
I've been considering constructing a volatility cone to compare implied volatility to realized close-to-close volatility. However, I was wondering how the typical bias adjustments you might make to an ...
- 121
0
votes
1
answer
81
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Delta volatility curve construction in practice
I want to construct a volatility curve $\Gamma = \{(\Delta_i, \sigma_i)\}$ but notice that the call and put with the same delta have a different vol (which shouldn't be the case in theory). Is the ...
- 13
0
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0
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45
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Canonical choice of inputs for Black76 model?
What is the canonical choice of inputs (e.g. interest rate, forward price, option price, time to expiration, etc) for the Black76 model? For concreteness let's say on the SPX index.
I am using the ...
user72785
1
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59
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Change in Option Price given Change in Implied Volatliity, Moneyness, and Maturity
I have an implied volatility surface parametrized into moneyless-maturity coordinates. At each period of time, I only have access to an option's moneyness (K/S), maturity, and change in implied ...
- 11
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0
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51
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Question about Example in Dynamic Hedging (Strong smile causing Put-Call Parity to not hold for American options)
On page 28 of "Dynamic Hedging" by Nassim Taleb, he uses the following example to demonstrate the fact that a rising volatility curve could separate puts/calls for American options because ...
2
votes
3
answers
454
views
How to calculate overnight implied volatility?
I am trying to workout how to calculate the implied volatility of the overnight movement from market close to open. That is, the volatility of the from the closing price $S_t$ to the opening price $S_{...
- 39
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0
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99
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Summarizing the Volatility Skew as a Single Number
Related questions to this topic/subject:
Expressing Volatility Smile as One Number
Volatility skew and how to capture it?
In both posts, the authors/respondents recommend using the second derivative ...
- 2,231
2
votes
1
answer
174
views
How should I go about computing the 30-day model free implied volatility (MFIV) daily?
As the title suggests, how can I calculate the MFIV daily (for a market index)? My MFIV follows the procedure described in DeMiguel et al. (2013) Improving Portfolio Selection Using Option-Implied ...
- 2,231
1
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0
answers
249
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Vol Smile Call/Put Wing calibration
Is call/put wing volatility smile calibration approach used in practice? To calibrate an index (SPY) using only more liquid OTM calls/puts, to kind of use an "if" condition on K to S0 to ...
- 145
1
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0
answers
71
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We can forecast the direction of (constant maturity) implied vol of various indices well. Is that useful?
We've been financial building ML models for years, and have multiple portfolios live - but we're new to the volatility space, none of us are options traders.
How could we effectively use implied vol ...
- 111
0
votes
2
answers
321
views
implied volatility for close to expiry ATM options vs VIX
All throughout my MFE I was told that implied volatility for close to expiry ATM options is a reasonable estimate for current volatility and tracks realised vol pretty well. Then why does VIX measure ...
1
vote
3
answers
552
views
Implied volatility greater than realized volatility at all strikes?
It is usually stated that the implied volatility is statistically generally --- not always --- greater than the realized volatility. It seems this statement is made with regard to the implied ...
- 2,876
1
vote
1
answer
850
views
Python - yahoo finance options data - volatility smile plot
I have plotted the IV of TSLA options using yahoo options data, but the scatter plot doesn't look right, can anyone advise why the plot looks like this? I would expect to see a vol smile plotted.
EDIT ...
- 145
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1
answer
135
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What does it mean with regards to market conditions that the historical volatility is twice the implied volatility
I am trading the Indian market indices. I calculated the last three years historical volatility. Noted down 1 standard deviation of this value.
Then I took a weekly expiry of options on this index and ...
- 111
5
votes
0
answers
315
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Best Method (Or Just a Good Method) of Predicting Intraday Volatility in Real Time?
I apologize if this is a stupid question, I'm a complete neophyte in academic finance but I am trying to learn.
I am trying to create an estimate of how likely indexes are to rise/fall by x% by the ...
- 63
2
votes
2
answers
455
views
How to apply put-call parity in volatility surface construction?
How to make the volatility surface free of put-call parity arbitrage? If I bootstrapped the implied vol from a call price and plugged it into the BS model to have a put price, what if it violates the ...
- 133
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0
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332
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Can the break-even of a straddle be lower than the implied move?
Let us consider a two day option:
1 day having a baseline vol of 16%
1 day having an event for which we want to find the implied move, higher than 16%
Is it possible that the price of the straddle ...
- 53
1
vote
2
answers
498
views
Why is Implied Volatility more important than skew for put spread pricing?
It is said on page 26 of the book "Trading Volatility: Trading Volatility, Correlation, Term Structure and Skew" by Bennett (2014) that:
A rule of thumb is that the value of the OTM put ...
- 173
1
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0
answers
106
views
Contradictory arguments for ATM/ITM/OTM option demand
I am trying to understand which of the options have the most demand, and found this discussion here. The arguments presented are as follows:
ATM is more liquidly traded than ITM/OTM because they are ...
- 185
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0
answers
477
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Convert implied probability into real probability
In this article I have read that:
A risk-neutral world is one where all investors are indifferent to risk and don’t require any extra risk premium for the risk they bear. In this world, all assets (...
- 113
5
votes
2
answers
361
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When calculating VIX, how to deal with the problem of asymmetry of put and call data?
I'm trying to calculate the VIX index according to the methodology of CBOE. I am looking at commodity options. I found that at some time, like at this minute, there are 13 call options out of the ...
- 51
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1
answer
2k
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Deriving strike from Delta
According to the following thread:
How can I calculate the strike price or implied volatility from a given delta?
To back out some strike given some Delta, you simply use realized vol (plus a few ...
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0
answers
155
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Best Way To Compute the Volatility Risk Premium
I'm trying to come up with a measure for the volatility risk premium (VRP) for a strategy I want to implement, but I'm not entirely sure how to proceed. My situation is as follows.
The underlying is ...
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4
votes
1
answer
231
views
When does the underlying become the derivative?
Since options contracts are created by open interest in the contract, it is conceivable that the notional of the total options contracts can exceed the value of the underlying. If that happens, does ...
- 6,672
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0
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242
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The relationship btwn RV-IV and realized skew
In studying skew I've been advised to focus on understanding on components that affect it. One such component that's been recommended to me is the relationship btwn RV-IV and realized skew. ...
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4
votes
2
answers
536
views
Should you compute the greeks on realized or implied volatility?
I am reading Trading Volatility by Collin Bennett and he says that you should compute the Greeks using realized volatility rather than implied volatility? Is this actually true? As far as I know the ...
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1
vote
1
answer
700
views
Pricing binary options under volatility smile
I was asked to show that the price of a digital/binary option $D$ while a volatility smile $\sigma(K)$ is present is given by
$$D= \exp(-rT)( \Phi(d_2) - K \sqrt{T} \phi(d_2) \sigma ' (K))$$
Where $\...
- 113
1
vote
3
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759
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Implied volatilities for different options that track the same stock
I have a somewhat basic question regarding option prices.
Suppose we have an underlying stock and two different options (that have different strike prices, maturities, etc.) that track this stock. ...
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1
answer
379
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is implied volatility derived from the option bid quote or the option ask quote?
I got SPX option prices from three different market data sources. In all of them, I can see bid and ask quotes. However, there is only one implied volatility. Does this implied volatility correspond ...
- 168
2
votes
2
answers
807
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FX option quotation in interbank market
I am looking at the different ways in which FX options (say EUR/USD option) are quoted in interbank markets.
Is it quoted using the option chain? I also saw a piece where it is said that it is quoted ...
- 133
7
votes
1
answer
2k
views
Vol, Gamma, Vega -- essentially all the same?
When talking to traders I hear this sentence a lot
I am a buyer/seller of X
where X = {vol, gamma, vega}
Is X basically all the same -- they are just saying -- I think implied volatility is cheap or ...
1
vote
2
answers
418
views
Early expiry option implied volatility
I’m new to this forum so first of all I wanna welcome everyone here.
I am a commodity trader, mostly covering option books (vanilla and structured one) and I would ask more expert people how they can ...
2
votes
2
answers
720
views
Is there some reason for volatility smile minima to be displaced from ATM?
I am analyzing some options data and I see that the volatility smile has its minima a few strikes higher than the current traded price (about 2.5 % higher than spot). I have checked my data thoroughly....
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votes
1
answer
781
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The most appropriate volatility model
Which would be the most appropriate models to find volatility trading opportunities (i.e. plot a theoretical volatility smile I can rely on) for the following instruments:
Options on equity
Options ...
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4
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1
answer
231
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How much does a rise in volatility in a short-term option affect a longer-term option
How would a rise in implied volatility on a short-term option affect the implied volatility of another short-term option with the same strike, but with slightly-longer expiry?
Assuming that the short-...
- 151
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1
answer
410
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Is there a Dupire's Formula for put options?
Generally, Dupire's formula is taking derivatives on the call option prices. Here it only uses information of the call options.
If now we have the data including both call and put options, is there a ...
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18
votes
1
answer
6k
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Bergomi: Skew arbitrage
In his paper "Smile Dynamics IV" (https://www.fields.utoronto.ca/programs/scientific/09-10/finance/derivatives/bergomi.pdf) as well as in his book "Stochastic Volatility Modeling" (...
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3
votes
1
answer
1k
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Can we model Implied volatility using GARCH?
Can I use Implied volatility as a dependent variable in a GARCH model? I believe my IV data shows ARCH effects and hence can I use it to model volatility of the volatility? I know literature has used ...
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2
votes
3
answers
386
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Expected Forward Volatility vs. Different Strikes
While theoretical options prices are derived from models, such as Black-Scholes, IV and IV skew reminds us that options prices are ultimately based on supply and demand. My question is the following: ...
- 555
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votes
2
answers
166
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Empirical equivalent for implied vol
Implied volatility is supposed to show volatility of the underlying over next k days where k - maturity of the option. Say our stock price is $S_t$ and percentage return is $r_t$. Then which empirical ...
- 117
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2
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471
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Calculating implied volatility index
What are common methods to compute implied volatility index?
One could use VIX method on other underlying.
It is also easy to limit the method to 4 atm strikes. Is this a good idea though?
What are ...
- 165
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vote
1
answer
288
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VIX vs S&P: Drift in the hedging residual?
I am looking at the daily returns of the VIX index (dVIX ) and the daily returns of the S&P 500 (dS).
I am running a linear regression (using 0 intercept) and get a regression slope of -1.4, i.e.
...
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0
answers
43
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Are there noticeable jumps in index options price due to systematic hedging of structured products close to big expiry dates?
I am looking at investigating factors that will cause jumps in index options prices close to big expiries in the name. I imagine systematic rebalancing of structured products will have a large impact ...
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