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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23 views

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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53 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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554 views

“Extract” the density of the underlying, given the implied volatility “surface”

Suppose given implied volatility quotations $\widehat{\sigma}(T_i,K_j)$ of call options on an underlying $S$ for various expiries $T_i$'s and strikes $K_j$'s. I am interested in the following problem :...
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100 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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1k views

Value of Call Option as Volatility goes to Infinity

Why would the value of a call option go infinity as volatility goes to infinity? I understand how you could solve this question by taking $\sigma \rightarrow \infty$ in the solution to the black ...
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3answers
239 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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534 views

what's the relationship between forecasted stock volatility and implied volatility?(option)

what's the relationship between forecasted stock volatility and implied volatility? I know that implied volatility is the volatility calculated by BS formula, is there any relationship between implied ...
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2answers
103 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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1answer
71 views

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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78 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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79 views

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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2answers
168 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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57 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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94 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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752 views

Understanding the ZABR model (an extension of SABR)

http://janroman.dhis.org/finance/SABR/ZABR%20Andreasen.pdf In this acticle the SABR model is first presented in another form ( see equation 7 in the article ) and then extended to the so called ZABR ...
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110 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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170 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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1answer
84 views

Fair Strike for Variance Swap with no Skew in IV Surface

I am reading through Derman's 1999 research notes, "More than you ever wanted to know about Volatility Swaps." In equation B4 of Appendix B, the author takes the Taylor Series of the variance swap ...
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111 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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86 views

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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2answers
156 views

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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168 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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1answer
80 views

Are vega vanna volga methods/models used in equity derivatives or only in FX and why?

Vega vanna volga models seem to be popular is the FX derivatives market and are often calibrated via 25 delta risk reversal, vega weighted butterfly, and ATM straddle quotes. I am wondering if they ...
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Reading this ichimoku cloud how do you read this wdfc chart?

Having trouble reading the charts as the breakouts aren’t clear What do you see in this chart?
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1answer
198 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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2answers
144 views

Interesting Undergrad Thesis [closed]

I'm searching for an undergrad thesis in finance. I already have some ideas, but still wanted to ask: Is there a an interesting topic that jumps to your mind, when you think about implied volatility (...
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423 views

CBOE Index Minute Data

I am doing a small research and looking for a place to purchase historical minute CBOE Index data. I am interested in: VIX - CBOE Volatility Index VVIX - CBOE VIX VOLATILITY INDEX VXV - CBOE VIX ...
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579 views

Transforming 3M volatilities into 6M volatilities in EUR forecast curves

I have implemented a stripping algorithm to extract forward volatilities from cap/floor flat volatilities for different currencies. I am however struggling a bit when implementing a method to convert ...
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58 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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2answers
116 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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1answer
67 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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1answer
104 views

MBS Market Duration & Convexity

Soft question...hopefully. I am working on a swaption hedging strategy. Part of this strategy calls for a forward looking indication of changes in implied volatility, using 1m10y implied as a proxy ...
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56 views

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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1answer
66 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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3answers
70 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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238 views

Using SVI model for IV surface

I am using well-known paper of J. Gatheral & A. Jacquier Arbitrage-free SVI volatility surface to explore SVI model. on the page 6 in the bottom is statet that The SVI-Jump-Wings (SVI-JW) ...
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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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267 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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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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2answers
280 views

Approximate Hagan formula for SABR model with negative beta

While looking into fixing the $\beta$ parameter (based the following regression: $\text{ln } \sigma^{ATM}_t = \text{ln } \alpha - (1-\beta)\text{ln }F_t$, as explained in West (2004), page 6) before ...
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1answer
279 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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1answer
2k views

Implied Volatility for Asian option

I am new to the topic of Asian options. Assume I want to price an Asian put (fixed strike, discrete average) in the Black Scholes world. I know implementations to calculate the value but what is the ...
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1answer
167 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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149 views

VXX Put pricing

Last week at Friday's close, the Dec 14 37.5 Put options were selling for \$.68 with VXX at \$40.29. This week at Friday's close, the Dec 21 37.5 Put options were selling for \$.38 with VXX at \$40.50....
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1answer
145 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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1answer
71 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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How do you explain the volatility smile in the Black-Scholes framework?

Does anyone have an explanation for the currently naturally forming volatility smile (and the variations) in the market?
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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 ...