Questions tagged [volatility-smile]
The volatility-smile tag has no usage guidance, but it has a tag wiki.
181
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Intuition behind the benefits of Stochastic Local Volatility (SLV) models [duplicate]
There have been various posts on this topic, but they don't really discuss the intuition behind the benefits of the stochastic local volatility (SLV) models over normal stochastic volatility (SV) ...
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3
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317
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Sticky delta vs sticky strike
I have been trying to get my head around these concepts but what I have found online has caused more confusion: specifically why a sticky delta model might lead to a higher delta or no. of contracts ...
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Incorporating 10-delta RR and BFLY market quotes into Vanna Volga pricing
I am looking into pricing FX options using the Vanna Volga method. I am aware of the commonly referenced shortcomings of this approach and the superiority of SLV, still it is something I want to do.
...
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Extending/Subclassing QuantLib Classes in Python?
I'm using quantlib via the quantlib-python or open-source-risk-engine both on pypi. The question relates whether it's possible to extend QuantLib term structure base classes in python rather than C++....
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what is the point of SABR model as an interpolation tool if we can already observe the whole vol cube from the market
on BBG and other data providers, it is common that you can find the whole vol surface/cubes. What is the point of the SABR model as an interpolation tool? why cannot people just linear interpolate the ...
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What's wrong with calibrating implied volatilities with polynomials?
People use different parameterization schemes to fit the implied volatilities from the market, e.g., SVI. But often times they cannot always fit well, e.g., the "W"-shape before earnings, ...
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Expressing Volatility Smile as One Number
Is there an accepted way in academia / industry to express the volatility smile as one number? (Not the full vol surface, but just the smile for a given option maturity: i.e. the implied vol as a ...
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In the context of derivatives pricing, what are Pillars and Marking?
as the title says, I've heard of the terms 'Pillar' and 'Marking' in the context of fitting volatility smiles and derivatives pricing in general and I'm having difficulties finding definitions on ...
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how to reflect spot and implied vol relationship in vol curve
There is much evidence about the correlation between spot price and option implied vol in the empirical. This is very important in risk management(i.e. delta hedge). I want to know how to add this ...
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Drift of stochastic variance as slope of the short end of the forward variance curve
I was re-reading Chapter 6 of Stochastic Volatility Modeling by Lorenzo Bergomi. On page 203, he considers a forward variance of the following form:
$$
d\xi_t^T=\lambda_t^T dZ_t^T,
$$
where $Z_t^T$ ...
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Questions on limitations of local volatility model
I am currently studying local volatility for equity models and I am trying to understand some limitations of the model:
1.
under local volatility, the forward smile gets flatter and higher.
Lorenzo ...
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Good resources about Volatility Calibration with code Snippet
As I just landed in the quantitative finance world, I would like to dig deeper into Volatility Surfaces construction.
I have a good theoritical background ( I'm familiar with volatility models ) but I'...
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what does correlation $\rho$ means in surface SVI?
Why does everyone say $\rho$ is correlation in Surface SVI?
$w = \frac{\theta_t}{2}(1+\rho\psi(\theta_t)k + \sqrt{(\psi(\theta_t)k+\rho)^2+1-\rho^2})$, with $\rho \in [-1,1]$
This paper says it is ...
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Using the SABR Model to Calibrate the Implied Volatility Smile/Surface of an American Option
If I already know the implied volatility smile/surface of an American option, can I directly use the SABR model to calibrate the smile/surface, or do I need to make certain adjustments first?
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Volatility swaps hedging
I have heard that traders use a straddle to hedge volatility swaps (in the FX context), although I could not figure out the specifics. Is this type of hedge used in practice? And if yes, how does it ...
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Smile wings and varswap pricing
Is it true that far wings of the volatility smile have an outsized influence on the price of a variance swap? Is there a mathematical argument demonstrating this idea? What do we generally refer as ...
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Is it possible to have only one volatility surface for american options (that fits both calls and puts)?
Put-Call Parity does not hold for american options. Hence, I don't see how it would be possible to have one surface that would encompass both calls and puts.
For example:
Let pick a call lying in the ...
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University Problem about interpolation Implied volatility BS Model (volatility smile)
Good morning,
this is my first question on this forum, I'm writing from Milan (Italy) and I have a question about a University Problem.
The problem is about entering in a Long Range Forward (buy a ...
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How you explain that result?
I'm reading this paper :
What Does the Individual Option Volatility
Smirk Tell Us About Future Equity Returns?
Yuhang Xing, Xiaoyan Zhang, and Rui Zhao∗
In section 2. A i found this equation:
... And ...
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Mid-curve swaption pricing - how to get the spread vol?
I believe I understand the following (from the accepted answer to the Quantitative Finance question called "volatility of a mid curve option"):
A swaption in which the underlying swap ...
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2
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hedging out of cross-ccy vol risk using direct ccy options [closed]
Lets suppose a G10 FX vol market-maker starts out with a flat book. During the day, the market-maker bought a EURUSD 1 week ATM straddle from one client while sold USDJPY 1 week ATM straddle from ...
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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 ...
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247
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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 (...
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simple volatility surface interpolation
I'm trying to build an implied vol surface from some listed options. In particular I have data for calls and puts for different strikes and expiries. I'm not looking to price on the interpolated vols ...
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Vasicek Model: smile dynamics
I have come across the statement that the Vasicek model cannot be used to price skew / smile sensitive products: i.e. it cannot be calibrated to replicate a skew or smile. Why is that?
My guess is ...
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How do market-makers profit & manage inventory when customers sell a lot of deep OTM options?
In a live example: Today is June 14, 1 hour before market close, and \$SPY (S&P 500 ETF) is currently at \$372.28 and the June 15 \$350 strike Put is being quoted for \$0.13 on the bid and \$0.14 ...
user46424
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Heston Model python MC simulation
I have this exercise.
$\\\\$
Look for realistic values of the parameters and calculate the price of a European Call with maturity $T = 0.5$ and $S_0 = 1$ for the strike values $K = 0.5,0.6, ......,...
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Help needed in replicating FX Implied Vol Surface
I am relatively new to this area and am doing some self studying on SLV model. I am however getting stuck on trying to replicate this implied vol surface (which I will use to calculate the local vol)
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Deriving vol of vol from volatility futures price
From Colin Bennet's trading volatility (pg 117), he says:
"A forward on a volatility future is short vol of vol. This means it is possible to back out the implied vol of vol from the price of ...
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Vanna-Volga consistency result
In the Vanna-Volga (VV) paper by Castagna and Mercurio they state that, once you build up a curve of prices by interpolating-extrapolating on $K$, you can recover the same exact curve by redefining ...
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285
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SABR LMM for RFR
Is there a research showing a way to use SABR LMM with new RFRs such as SOFR, i.e. pricing exotic path-dependent RFR derivatives with volatility smile and skew?
I'm aware that
Looking Forward to ...
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Market models of implied volatility and no arbitrage
Something has been bugging me for a while, and I can't really find an answer to it in papers. Maybe somebody can help me out.
In addition to modelling the instantaneous vol, or modelling forward ...
user34971
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Expectation of Product of two European Option when vol smile exist
Currently I'm thinking about how to calculate the expectation of the product of two euro option, which is
$E[(S_T-K_1)^+(S_T-K_2)^+]$
I can fit some parametric vol model from the market listed option ...
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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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Calibration of a volatility smile model on a partial smile
I'm using a well-known SABR model in order to build an implied volatility surface of caps/floors on a very illiquid market which is entirely missing OTM quotes. What happens to SABR implied smile/...
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How to calculate the strike for a sticky delta volatility curve
I am sourcing the implied volatility for pricing the option. I am getting the volatility against delta but not the strike amount for those. How do I convert the delta into the strike to find the right ...
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Bloomberg OVML| FX option pricing | Python
Wanted to check if any API for python is available to replicate Bloomberg's OVML.
The objective is to perform FX options pricing for multiple positions, and we are getting stuck in calculating ...
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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 $\...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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) ; (...
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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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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 ...
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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 ...
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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 (+) = ...
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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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