Questions tagged [volatility-smile]
The volatility-smile tag has no usage guidance, but it has a tag wiki.
2
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1answer
73 views
SSVI parametrization motivation , SSVI implementation
I've read the following paper of Gatheral and Jacquier https://arxiv.org/pdf/1204.0646.pdf about volatility surfaces. I'm thinking about the SSVI surface. Is there any motivation why they choose ...
1
vote
1answer
39 views
Filter options used in the construction of implied volatility surface
Currently trying to model the IV Surface using the APPL options, to compare how different models of the underlying move the IV Surface. However, after getting the data, I've seen that some option ...
5
votes
0answers
98 views
Arbitrage free smoothing of volatility smile - cubic spline - implementation procedure
I am studying the paper Arbitrage-Free Smoothing of the Implied Volatility Surface, from Matthias R. Fengler (https://core.ac.uk/download/pdf/6978470.pdf).
The problem I want to solve is much simpler ...
0
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0answers
49 views
What is price level dependence of volatility
I am trying to understand the term level dependence of volatility as mentioned in Pricing of options on assets with level dependent stochastic volatility. Is this same as leverage effect mentioned in ...
5
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3answers
822 views
Forward implied volatility
Can one price accurately by only using vanilla options a derivative that is exposed/sensitive mainly to the forward volatility ?
If it is impossible in the real world, what do we mean by saying "...
0
votes
0answers
29 views
how to derive vol curve for cross rate
For example I can get vol curves for two assets, say XAU/USD and XAG/USD for time T, I can calculate their asset correlation, obtain probability dension functions. Is there a proper way to synthesize ...
1
vote
0answers
51 views
Effect of Volatility Regime on Volatility Smile
For short-term FX options, I find empirically that the degree of curvature of the smile (OTM/ATM in %) is higher in low volatility environments. Similar results are found by Pena et al. ("Why do we ...
2
votes
1answer
51 views
Literature on quoting vol surfaces in the absence of listed option prices [duplicate]
What are some of the modern methods used to price equity volatilities "the most accurately possible" when there are very few listed derivative prices available or even none at all? Do the pricers in ...
1
vote
0answers
53 views
Question about derivation of SABR volatility formula in original paper 'Managing Smile Risk' by Hagan et al
I have a question regarding the starting point of the derivation of SABR volatilities formulas in the appendix of the famous paper 'Managing Smile Risk' by Hagan et al.
To derive SABR volatility ...
0
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2answers
155 views
How should I convert FX Volatility Surface from one base currency to another?
This might be a very simple question but I wanted to understand how to convert FX volatility surface points which are quoted in one base currency to another currency?
Eg I have fx vol quoted in EUR ...
1
vote
1answer
96 views
stochastic vol modelling not enough for smile
It seems in practice models that include Stochastic Volatility alone do not have enough power to produce actual observed implied vol surfaces. Is there recent empirical literature documenting this?
0
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0answers
80 views
Anomaly detection in volatility skews / term structure
I'm currently working on some algorithms to help the risks team detect anomalies in the volatilities of equities that are pushed every day in the systems. I quickly thought about using clustering ...
6
votes
1answer
283 views
SSR definition in Bergomi in relation to sticky strike and sticky delta
In Bergomi [Stochastic Vol Modelling] (Sec. 2.5.2), in the section on surface dynamics, the following definition of the "Skew Stickiness Ratio" (SSR) is made:
$$ SSR = \dfrac{1}{\mathcal{S}_T}\frac{d\...
3
votes
1answer
283 views
MTM Hedging Performance of Vanna-Volga
I was wondering how well Vanna-Volga (VV) Implied Vols "perform". So I experimented with the following option parameters
$$S_0=100,\ K=92,\ r=0.03,\ q=0.01,\ T=2$$
and VV parameters
$$K_1,K_2,K_3=...
0
votes
0answers
96 views
How to deal with no-arbitrage violations to fit the volatility smile?
I have a database of options for single stocks, with a lot of aggregated data. I noticed that sometimes (especially for stocks with few points) I have a concave volatility smile because of an outlier ...
1
vote
1answer
157 views
On a FX volatility smile, Is a-delta put volatility equal to (1-a)-delta call volatility?
On a FX volatility smile in terms of delta,
If I want 95-delta put vol, Is this volatility equal to a 5-delta call vol, and viceversa?
Thanks.
1
vote
1answer
205 views
Mixture models of Stochastic Volatility and Local Volatility
As far as I can see on this website the stochastic volatilty models seem to be preferred to local volatility models, mainly due to the fact that stochastic volatility is 2D diffusive process whilst ...
1
vote
2answers
537 views
Marking implied vol surface daily with sticky strike and sticky delta
Suppose that implied vol surfaces are calibrated once per month due to data restrictions (i.e. option data is only available at month end). How can a trading desk remark their vol surfaces on a daily ...
6
votes
1answer
115 views
How are the BKM risk-neutral moments derived?
I've been doing a lot of research on implied volatility skewness, and one of the most commonly cited papers I've come across is "Stock Return Characteristics, Skew Laws, and the Differential Pricing ...
1
vote
1answer
291 views
Extrapolation of the volatility smile
Are there any market practices to extrapolate the volatility smile for equities? I already have an arbitrage free interpolated call prices data and I'm looking for a method to extrapolate beyond the ...
2
votes
1answer
343 views
“Black-Scholes model implies flat implied volatility plots”?
I am a beginner in Finance and I get confused by the statement "Black-Scholes model implies flat implied volatility plots"
Here is one form of this statement: (Dan Stefanica, 150 most frequently ...
5
votes
2answers
367 views
Why is the volatility smile so important
This might seem like a dumb question.
When using a volatility model, stochastic for example, we try to calibrate it so that it fits the implied volatility smile given by the market, but why is this ...
1
vote
1answer
46 views
Shape of smile after converting to prices
I have smile data which looks like this,
but after converting the vol points to prices using black's model, i got something like this,
is this expected?
I was expecting the shape of the smile to ...
5
votes
1answer
414 views
What interpretation can I derive from an inverted volatility surface?
While pulling some reports from Bloomberg today I came across the volatility surface for NYSE: ONDK, set for an earnings call next Monday. From what I've seen before (not much, 1 month on the job and ...
8
votes
2answers
464 views
Why is there greater demand for OTM and ITM options than for ATM options?
I´m currently writing a project on volatility trading and dynamics.
The literature often states higher demand for OTM (out-of-the-money) and ITM (in-the-money) compared to ATM (at-the-money) options ...
0
votes
1answer
1k views
From Delta to moneyness or strike
If I have volatility smile quoted with respect to the delta of an option on the forward, how can I convert this delta into the moneyness or strike of the option?
Is there any bult-in function of ...
0
votes
1answer
124 views
What parameters give a smile (not smirk) in Heston?
I am trying to create a smile in Heston model, however, as of yet, I have only been able to get smirks (i.e., big negative slope ITM that flattens out ATM, and then a very small positive slope OTM).
...
1
vote
3answers
316 views
Reference: Vanna, volga, vega approximations
I am looking for a reference on how to approximate implied volatility in a stochastic model vis-a-vis vanna, volga, vega, and other model parameters, in particular the derivation of such equations and ...
3
votes
1answer
602 views
Spot and Vol Correlation in Idealised Regimes of the Volatility Surface
From http://www.globalvolatilitysummit.com/wp-content/uploads/2015/10/Santander-Volatility-Trading-Primer-Part-II.pdf it states that there are the four idealised regimes of volatility surface.
1) ...
2
votes
1answer
156 views
Why is the right part of the vol smile referred to as call skew
I often see the right part of the vol smile referred to as 'call skew'. However, due to put/call parity, this also represents skew for ITM puts. Is there a reason behind this convention?
9
votes
2answers
2k views
Arbitrage Free Volatility Smile
When ATM implied volatility is higher than OTM put and call I believe that the volatility smile is no longer arbitrage free? Why is that?
On the other hand, when ATM implied volatility is lower than ...
5
votes
2answers
541 views
Volar Higher Order Parametrizations
I came across this presentation from volar.io. The authors show fitting examples for a flexible volatility smile parametrization in 5 to 8 parameters which is also able to fit the locally concave ...
1
vote
3answers
384 views
At-the-money and volatility smile
In a volatility smile; why is the ATM point usually or ideally at the bottom? In other words, why is the "smile" smile shaped as opposed to another shape?
3
votes
1answer
327 views
Shifted SABR for negative strikes
I am trying to apply SABR on EUR inflation caplets, with positive forward and negative strikes. Classical BS pricing is undefined, and so is SABR. I have read about the shifted SABR, which is supposed ...
1
vote
1answer
184 views
Volatility Smile/skew in volatile markets
In a volatile market with uncertainty it's more likely that we see a volatility skew and not so much a smile. Therefore it must hold that, in chaotic markets, out-of-the-money calls and in-the-money ...
1
vote
1answer
254 views
SABR model: from calibration to mapping the smile/skew in a graph
Let's say that I have a calibrated SABR model in FX market (eg for Eurodollar options). So I have estimated values of beta, rho, alpha, and vol of vol. How do I map the calibration in a (strike, vol)-...
5
votes
4answers
2k views
Downward sloping smile in normal model
We consider an stock price $S$ following a normal model: $dS_t = \sigma dW_t$
We can write this as $\frac{dS_t}{S_t}=\frac{\sigma}{S_t}dW_t$
Hence we can see that $S$ follows a "log-normal" ...
1
vote
1answer
111 views
construct volatility smile based on historic observations
So I calculated historic volatility/skewness/kurtosis for a commodity. I now would like to construct a volatility smile that reflects this historically realized distribution. I tried using some ...
1
vote
1answer
106 views
Is it possible to find / estimate the volatility surface of non-listed index options?
I have 3 QNET options (european, 2 puts, 1 call, all same expiry, different strikes) that the broker is pricing clearly off a volatility surface. Bloomberg only carries historical volatility and I ...
1
vote
1answer
530 views
ATM volatility and flat volatility
Why do the implied volatility curve and the flat curve cross over the ATM volatility (at 100%) ?
Tx
3
votes
1answer
218 views
What are some markets that don't have volatility smiles and why don't they?
I have read that volatility smiles didn't show up for equity options until 1987. Can some one give me an example(s) of what markets now still don't have volatility smiles and what an explanation for ...
8
votes
0answers
432 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 ...
2
votes
0answers
288 views
Vol surface changes as underlying moves
We market make in highly liquid, near term options markets. I want to build a risk report that tells us how our portfolio's greeks will change as the underlying moves. This is for risk management in ...
1
vote
1answer
291 views
SVI calibration, why fit to option prices and not implied volatilities
Bear with me. Related (very good) question: How to calibrate a volatility surface using SVI
From this paper http://arxiv.org/pdf/1204.0646.pdf, page 21.
Why does the recipe suggest fitting to option ...
1
vote
4answers
524 views
Volatility smile risk (negative effect) on dynamically hedged portfolio?
About last week you can see MSFT call & put option appears to be resembling volatility smile.
And then I open trade positions on a 4 MSFT long call option contract (all 4 contract with fixed/...
2
votes
2answers
2k views
Vega hedging with implied volatility smile
I have a problem with vega hedging.
Consider the management of an exotic derivative, such as Barrier option. Typically we do the following tasks:
selecting a pricing model, say, a local volatility ...
1
vote
1answer
154 views
Connection between implied volatily and implied probability
I am reading some lecture notes about Black-Scholes (BS) option pricing. Since the BS-formula is not supported by observed data because of the dependence of the implied volatility on the strik and ...
3
votes
1answer
576 views
Why is the volatility smile important
One thing I can't understand clearly is why there is so much focus on the volatility smile. Given my knowledge of the Black and Scholes model, this is what I get:
People use the volatility smile as a ...
3
votes
1answer
1k views
parameters in Heston model and their impact on volatility smile
Consider the Heston model given by the following set of stochastic differential equations:
$$\frac{dS_{t}}{S_{t}}=\mu_{t}dt+\sqrt{V_{t}}dW_{t}, S_{0}>0,$$
$$dV_{t}=\kappa(\theta-V_{t})dt+\xi\sqrt{...
3
votes
1answer
494 views
Why future (forward) volatility smile is important to path dependent option?
I was wondering why future volatility smile is important to path dependent option and American type option such as Bermudan swaption. It would be best if someone could provide a reference article as ...
