Questions tagged [volatility-smile]
The volatility-smile tag has no usage guidance, but it has a tag wiki.
117
questions
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0answers
30 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
120 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 ...
3
votes
1answer
105 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
70 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
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1answer
60 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 ...
1
vote
2answers
156 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
106 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
150 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
189 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 ...
2
votes
0answers
48 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
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1answer
106 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: ...
2
votes
1answer
140 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
64 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
0answers
35 views
How does the real market calculate the option prices when strikes are very small?
I'm working on the S&P500 European index options data(call options). On 2017-10-23, we have the closing price as 2564.98, and risk free rate is 1.09%(3 months treasury bill). If I choose the ...
0
votes
1answer
47 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
172 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
344 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
148 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)
$$
where $I_{ATM}(...
9
votes
4answers
2k views
Implied Vol Smile: from Calls, Puts or Both?
This might be a simple question, but I couldn't find the answer anywhere: is there a separate Volatility smile (and surface) based on Calls and a separate Volatility smile (surface) based on Puts? Or ...
1
vote
0answers
38 views
Terminology : definition of skew for a volatility smile
Is there a generally accepted definition of skew for volatility smiles? Is skew always defined as
$$
\frac{\partial{\widehat{\sigma}(K,T)}}{\partial{K}},
$$
where $\hat{\sigma}:[0;+\infty)\times[0;+\...
3
votes
1answer
147 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 ...
1
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1answer
84 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.
1
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0answers
185 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 ...
0
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0answers
30 views
Looking for a math description of upside/downside implied vols - does Dupire help?
This is in continuation of this post which explained the meaning of the vols in the vol smile as follows:
Suppose you have a downsloping vol smile. Then, the fact that the vol is higher on the ...
4
votes
1answer
204 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 ...
0
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0answers
18 views
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.
1
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1answer
79 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
1answer
91 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
864 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
182 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 ...
6
votes
1answer
167 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
731 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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0answers
93 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 ...
1
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0answers
61 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 ...
2
votes
3answers
379 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.
0
votes
1answer
180 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:...
2
votes
0answers
197 views
Risk reversal basics and trading strategies
It it written in the book by Giles Jewitt:
"If a currency pair had a completely flat volatility smile, the risk reversal strikes would be positioned approximately symmetrically around the ATM strike ...
1
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0answers
64 views
FX Smile Curve Extrapolation
How a smooth smile curve is generated from 5 smile points : 10D RR, 25D RR, 10D SM, 25D SM and ATM? What are the commonly used extrapolation and interpolation techniques?
I have seen people ...
2
votes
1answer
153 views
FX smile extrapolation
Typically, 5 points data is available for smile construction : 25D RR, 25D SM, 10D RR, 10D SM and ATM. Questions: 1. How is a smooth smile curve generated with the help of these? 2. How is ...
2
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0answers
254 views
Smile Strangle and Market Strangle
What is the difference between Smile Strangle margin and Market Strangle Margin in fx derivative market? Is it just variation in convention or is there any mathematical relationship between the two?
3
votes
2answers
624 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 $...
2
votes
0answers
155 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 ...
1
vote
3answers
602 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
1
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1answer
140 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 ...
7
votes
1answer
1k 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 ...
1
vote
0answers
200 views
FX Volatility smile interpolation delta or Log moneyness - which is better?
I am trying to understand the difference between interpolating an FX volatility smile across deltas and log moneyness ( ln(K/F))
Since Delta is dependant on the vol, it seems there is a difference ...
4
votes
1answer
243 views
Effect of Vol-of-Vol on VIX
What is the effect of vol-of-vol of an underlying on the VIX Index?
The VIX is computed as hedging portfolio of log contracts to isolate pure volatility exposure without specifying an underlying ...
1
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2answers
320 views
Volatility smile shows individual Put and Call IV or combination
IV is calculated per strike AND option type basis(for example WTI 50 CALL its x and WTI 50 PUT its y). The question is when its shown in "Smile" its just shown on strike basis, so does that mean lower ...
3
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1answer
479 views
LSV model calibration with only few quotes per maturity
At this link I have asked what is the market standard when pricing options in different asset classes. Based on the answers, the standard for FX and equities seems to be the local-stochastic ...
1
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1answer
572 views
What is market standard model in equity, FX and interest rates exotics?
Is there any industry consensus about the model to use for pricing exotics in equity, FX and interest rates?
I assume that for vanilla options they all use Black model, but how about exotics?
Also, ...
