Questions tagged [volatility-smile]
The volatility-smile tag has no usage guidance, but it has a tag wiki.
144
questions
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58 views
Can call price increase in falling markets
Say SPX falls so much that there is panic and implied volatility(iv) increases so greatly that OTM call prices are increased during the fall due to high iv
In my observation in historical data this ...
0
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0answers
37 views
Clarity regarding Skew adjustment for binary options
I am reading the section on Skew adjustment for binary options on wikipedia (https://en.wikipedia.org/wiki/Binary_option#Skew) and am trying to get my head around it and gain some intuition.
First ...
1
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1answer
295 views
Fitting a volatility smile with pySABR -- Python implementation of SABR model
In order to model some volatility smiles I'm using the python's pySABR package.
I ran into a situation when I have two almost identical pieces of code for two different volatility smiles missing the ...
0
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0answers
18 views
Local volatilty models for fixed maturity curves with sparse equity data
I'm implementing an options analytics platform - with sparse market data going out a few months. Mostly equities and fx options. Building a fixed maturity curve like the one on quikstrike by bantix is ...
0
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1answer
226 views
Can't fit Bloomberg volatility smile with pysabr. What am I doing wrong?
I want to make sure that I can properly use SABR model on 1-period interest rate options, i.e. caplets, therefore I attempted to get lognormal volatilities for 4%, 6%, ATM, 8%, 10% strikes for 3Mx6M ...
0
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0answers
56 views
what is option zeta?
Is this an option greek? I've come across this term in some option book, and also online definition e.g. HERE:
A measure that captures the premium difference between the value of an
option calculated ...
4
votes
0answers
104 views
Why calibrate volatility Models to volatility surfaces rather than underlying's historical price data?
I'm trying to grasp the rationale for calibrating stochastic volatility models (i.e. Heston model) to empirical IV data from market prices. Doesn't this assume that the options are fairly priced and ...
1
vote
1answer
109 views
How to extract volatility smile implied by a mixture model?
If one had to extract the implied volatility smile from a local volatility model, one can simply use the relationship:
$\sigma^2_{imp}(t, x)T = \int_t^T \sigma^2_{loc}(s, x)ds$
with $\sigma_{loc}$ the ...
0
votes
1answer
143 views
Difference of polynomial interpolation for volatility smile
I am using 5 volatility points to build a volatility smile : put 10D, put 25D, ATMF, call 25D and call 10D. I have thus 5 pairs of data : (Delta, Vol) let's say for example (10;5.75) ; (25; 5.50) ; (...
1
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0answers
52 views
is the concept of skew observed in fixed odds betting markets?
Bear with me if this sounds a little flippant, but this has got me curious. I know "sports arbitrage" is an active economic activity, although the arbitrage arguments, I think, are not ...
2
votes
1answer
64 views
Do single name stock option volatility surfaces exhibit steeper volatility smiles after stock price crash episodes?
In index options, there was not much of a smile (on the put-side) until the 1987 market crash.
I'm wondering if the same applies to single name stocks? That is, do price crashes in individual stocks ...
5
votes
2answers
289 views
Black-Scholes: Volatility Smile "sharpens" with time to expiry
I have tried to calculate IV and log-moneyness (=log(S/K)) for different times to expiry
(M = less than 1 month, Q = less than 1 quarter, S = less than 1/2 of an year, Y = less than 1 year, Y (+) = ...
0
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1answer
181 views
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 ...
7
votes
1answer
315 views
Bermudan Swaptions - Payer vs. Receiver (LGM)
There is abundant literature discussing the pricing of Bermudan swaptions and the relevance of single-factor Markov-functional models (e.g. LGM) versus multi-factor market models (e.g. LMM).
From a ...
7
votes
1answer
194 views
Negative Density in Local Stochastic Volatility (LSV) Model Calibration
I'm trying to calibrate Local stochastic volatility model using finite difference method, and I'm mainly following this referece: Tian (2015).
I met a problem when calibrating leverage function - the ...
2
votes
1answer
279 views
What is the difference between a volatility smile and a correlation smile?
I understand to plot correlation and volatility smiles, we have to plot the implied normal vol vs strike and observe a U-shaped relationship. How are these smiles different? Does a vol smile plotted ...
4
votes
2answers
188 views
Intuitive explanation for the value of a binary option being lower when volatility skew is positive?
According to the formula for pricing binary options with a volatility skew, it appears that the value of the binary option for a given strike gets lower, the higher the volatility skew at that strike. ...
4
votes
1answer
130 views
Can we observe smile arbitrage from the implied and local volatility?
Here are graphs of implied volatility and local volatility. Our prof mentioned that we can observe that the short end low strike region has some smile arbitrage. I would like to know how?
Thanks
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0answers
60 views
How could option vega be remapped on reduced volatility surface?
try to be clear to ask my question:
Suppose the original vol surface is a n by m matrix where n is the number of pillars in the volatility term structure and m is the number of strikes. According to ...
1
vote
1answer
143 views
Clean noisy data from arbitrage
My problem is that I have a surface of implied black volatilites that is supposed to represent market data. However, the surface contains some slight arbitrage.
More precisely, the graph contains ...
2
votes
1answer
195 views
Relationship between time decay and gamma
In a paper titled Investing in Volatility published in 1998 by Emanuel Derman, Michael Kamal, Iraj Kani, John McClure, Cyrus Pirasteh, and Joseph Z. Zou, I found the following assertion (on page 9) ...
2
votes
1answer
189 views
Forward starting options concepts
Consider $t_0<t<T$, with $t_0=0$ (today date) and the standard payoff of a vanilla forward starting call option,
$F_{t,T} = (S_T - S_t\cdot K)^+$, with strike $K$.
If the price of this option is ...
1
vote
1answer
82 views
How does a concave up volatility smile correct high kurtosis for ATM option contracts?
Theoretically speaking, if we are to assume the following:
Constant implied volatility throughout all strike prices
The underlying's prices change distribution is log-leptokurtic and symmetric
Then ...
2
votes
2answers
416 views
Question About SVI and SSVI Tradeoff between Fitness and No-Arbitrage
I’m currently working on a project to build a local volatility model out of implied volatility data and am struggling in the selection of an appropriate method to interpolate the volatility surface. I ...
4
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0answers
145 views
Angular bracket notation (physics)
In a few papers I have seen the following notation:
$$
\langle X_t \rangle
$$
Also, in Bergomi's book, at page 8, we have the following equality:
$$
\biggr\langle \int_0^T e^{-rt}s^2 \frac{d^2P_{\hat{\...
6
votes
0answers
191 views
Hedging : effect of not matching the term structure of skew
Let us assume that we construct a pure stochastic volatility model calibrated to the implied volatility surface, but that the model does not replicate accurately the observed term structure of the ...
4
votes
2answers
224 views
Is the volatility smile a thing of the past?
Looking for example at this image from bloomberg of the OMX volatility surface, there is only a faint resemble of a smile at the shortest tenors that quickly dissipates as maturity is increased. I ...
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vote
0answers
121 views
How does a volatility surface based on moneyness instead of strike stay consistent with put-call parity?
By definition due to put-call parity the implied volatility will be the same for puts and calls with the same strike price and time to maturity. Meanwhile, a volatility surface is often quoted in ...
1
vote
1answer
145 views
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: ...
1
vote
1answer
442 views
Interpreting SABR calibration model output
Calibrate a SABR model?
Following on from this question, I have used the same market data they attached but am unsure on interpreting the output.
When I plot the SABR probabilities against strike for ...
1
vote
1answer
91 views
Non-Trivial ATM Volatility in Vol smile construction from Market data on US Equities
have 2 quick questions please help.
Constructing vol smile (OTM puts & OTM calls) from US equity market data. for Parabolas fit or other methods, the choice/method for ATM vol is non-trivial, ...
0
votes
1answer
71 views
Trading butterfly a long vol or short vol [closed]
Sorry for what could be a naive question.
When is the right time to trade a butterfly i.e. (buy 10d call and put vs sell atm all notional flat) is it when implied vols are high or low (relative to ...
0
votes
1answer
234 views
Implied Volatility vs Actual Volatility Calculation
To build a term structure I need different volatilities; as I don't get them at every strike, I use interpolation technique to calculate the rest and plot. This is how I calculate the implied vols. ...
4
votes
1answer
454 views
What does it mean that model can reflect the ”volatility smile”
I know that implied volatility is the value for which the Black Scholes model returns the correct option price. I also know that if we plot the volatility on the strike price chart, we will see "...
5
votes
1answer
244 views
Hedging a FVA in practice
A FVA (forward volatility agreement) is a forward contract on the ATM implied volatility. So at at maturity date $T$ the payoff of a FVA with unit notional is
$$
(I_{ATM}(T,T') - K)
$$
where $I_{ATM}(...
10
votes
4answers
2k views
Implied Vol Smile: from Calls, Puts or Both?
This might be a simple question, but I couldn't find the answer anywhere: is there a separate Volatility smile (and surface) based on Calls and a separate Volatility smile (surface) based on Puts? Or ...
1
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0answers
48 views
Terminology : definition of skew for a volatility smile
Is there a generally accepted definition of skew for volatility smiles? Is skew always defined as
$$
\frac{\partial{\widehat{\sigma}(K,T)}}{\partial{K}},
$$
where $\hat{\sigma}:[0;+\infty)\times[0;+\...
3
votes
1answer
211 views
FX ATM-volatility quotes
Is the implied volatility ATM the same for a currency pair as for the inverted currency pair. I.e, can I expect the same volatility quote ATM for (for an instance) EURUSD as for USDEUR? And does this ...
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1answer
120 views
Do all stochastic volatility models capture volatility smile?
I started reading SABR model recently.
In Wiki page, it states that the SABR model can capture volatility smile in derivative market.
However, I do not see how it does so.
2
votes
0answers
218 views
FX Smile Polynomial Fitting
I am unable to reproduce the example of FX polynomial smile interpolation on page 59 of the book FX Option Pricing by Iain Clark shown below. Consider just the ATM volatility as a specific case. I ...
5
votes
1answer
358 views
Hedging vega risk with varswaps
I have encountered a statement that in summary reads like this:
Varswaps became popular after the LTCM meltdown due to high levels of implied volatility the market was seeing at the time. Hedge funds ...
1
vote
1answer
102 views
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.
2
votes
2answers
145 views
A PARADOX? - relationship between risk reversal (slope of vol smile) and digital price
how do we resolve this seeming paradox?
lets take GBPUSD now: it has a negative risk reversal, ie putvols > call vols , because traders expect spot to fall, so they are buying puts, pushing their ...
0
votes
2answers
2k views
Heston volatility surface in Python QuantLib
Does anyone have experience with the Python QuantLib function HestonBlackVolSurface?
I'm trying to produce a 3D plot of the volatility surface as done in the ...
1
vote
1answer
394 views
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 ...
7
votes
1answer
333 views
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 ...
3
votes
2answers
1k 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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vote
0answers
93 views
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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0answers
119 views
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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0answers
69 views
Extreme AUDJPY FX vols
I'm seeing levels of -12% of market strangle vol at 25 delta for AUDJPY at 20Y onward that is causing havoc with my pricing routines, the 10 delta market strangle is trading around -6% which is again ...
