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Why do we use OTM options to extract implied vol?

It is often common practice to calculate implied volatility using puts for low strikes and calls for high strikes, so to always employ out-of-the-money options. Why is this often preferred to using ...
Mr Frog's user avatar
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What are common parametric forms for VIX smiles?

It is common in SPX markets to fit smiles using Stochastic volatility-inspired and Surface stochastic volatility-inspired parametric forms introduced by Gatheral and Jacquier (2014). In VIX markets ...
Mr Frog's user avatar
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Volatility Surface Modelling in Python

For my master thesis, I try to create a Volatility Surface for S&P500 Index options. Every time I run my code, the surface I get is full of spikes. I'm just not sure if these are outliers which ...
Aaron 's user avatar
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Summarizing the Volatility Skew as a Single Number

Related questions to this topic/subject: Expressing Volatility Smile as One Number Volatility skew and how to capture it? In both posts, the authors/respondents recommend using the second derivative ...
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Functional From to Approximate Volatility Surface

I have a finite difference pricing model and would like to factor in a volatility surface for each underlying equity. However, I have limited data. Essentially I'm just pulling a few implied ...
Charles0349's user avatar
3 votes
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What are some effective and easily implementable volatility smile/skew smoothing models?

Inspired by another post on Bakshi et al. (1997), the paper talks about the feasibility of option pricing models, particularly the SVSI-J variant. I would like to ask the Quant community if there are ...
KaiSqDist's user avatar
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GSABR model vs SABR model

I've read about the SABR model for pricing options, however I am told there is a variant called GSABR. Does anyone know how this model differs from the original SABR model?. Any papers would be really ...
David's user avatar
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Are there standardized measures to characterize the volatility skew?

Might be too simple a question, but I saw in Gatheral & Jacquier (2014) that commonly used features to match volatility skews are (and then I subsequently ChatGPTed some commonly used industry ...
KaiSqDist's user avatar
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1 vote
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Estimating dynamics of volatility surface?

I have a daily time series of volatility smiles for an option contract. How can i calculate whether the smile is sticky strike, sticky delta or something in-between!
David's user avatar
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What is the informational content of the volatility skew?

The option-implied volatility is well-known as a measure for the risk-neutral future expected risk for the underlying asset. However, the market prices of options (across different strikes) imply ...
KaiSqDist's user avatar
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4 votes
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How is option pricing related to the correlation between implied volatlity and the underlying?

The correlation between the index returns (e.g SPX) and its changes in option-impled volatility (e.g. VIX), is strong, stable and negative (the implied volatility feedback effect). To me at least, it ...
Mats Lind's user avatar
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Future Implied Price from Option Implied Distribution

Been reading on option implied distributions and understand that this can be transformed into a confidence interval/fan chart showing the implied future price. Was wondering how I could go about doing ...
nzc's user avatar
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Vol Smile Call/Put Wing calibration

Is call/put wing volatility smile calibration approach used in practice? To calibrate an index (SPY) using only more liquid OTM calls/puts, to kind of use an "if" condition on K to S0 to ...
Skittles's user avatar
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1 answer
243 views

filtering implied Vol surface for butterfly arbitrage

Suppose I have a volatility surface (matrix in time and strike) but it might have butterfly arbitrage in it. I want to remove nodes from the surface so that the Vol surface is butterfly arbitrage free....
Madhuresh's user avatar
2 votes
2 answers
301 views

Delta on x-axis in Volatility smile

I want to ask a perhaps simple question: Why do we use delta on the x-axis instead of the strike price when discussing volatility smile or volatility surface? In the book I'm currently reading, it is ...
Miroslav Holub's user avatar
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1 answer
28 views

week-over-week impacts on IV of of options with close to before/after EOY expirations

Tomorrow is the last trading day of 2023. Compared to last week, I noticed that $SPY ATM or close-to ATM options for the end of month/quarter (Dec-29) exp experienced a spike in IV since yesterday, ...
VolatiCity's user avatar
3 votes
1 answer
181 views

smile dynamics IV appendix 4

I am having difficulty in recovering some result in smile dynamics of Bergomi https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1520443, the paper gives $(1-3\alpha x +(6\alpha^2 - \frac{5}{2}\beta)...
opsle's user avatar
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Cash Dividend implies skewed (negative) vol smile?

Say we have a stock $S_t$ which pays a cash dividend at $T_D$ of amount $div$. Let us assume rates $r=0$, for simplicity. Then the forward is $F_{T_D} = S_0 - div$, and we can compute the continuous ...
Phil-ZXX's user avatar
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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) ...
THATS MY QUANT MY QUANTITATIVE's user avatar
2 votes
3 answers
2k views

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 ...
NojaQU's user avatar
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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. ...
Wojciech's user avatar
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2 votes
2 answers
271 views

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++....
Phil's user avatar
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1 answer
267 views

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 ...
Peaceful's user avatar
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3 votes
4 answers
438 views

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, ...
Michael's user avatar
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2 votes
1 answer
190 views

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 ...
Jan Stuller's user avatar
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1 vote
1 answer
173 views

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 ...
user619755's user avatar
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0 answers
36 views

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 ...
aicer's user avatar
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3 votes
1 answer
113 views

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 $Z_t^T$ ...
fwd_T's user avatar
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1 vote
0 answers
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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 ...
StochasticMan's user avatar
2 votes
0 answers
101 views

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'...
StochasticMan's user avatar
1 vote
0 answers
98 views

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 ...
StupidMan's user avatar
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2 votes
1 answer
356 views

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 ...
fwd_T's user avatar
  • 747
0 votes
1 answer
319 views

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 ...
fwd_T's user avatar
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6 votes
2 answers
3k views

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 ...
Rodrigo's user avatar
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0 answers
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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 ...
Ivan Rivera's user avatar
3 votes
0 answers
131 views

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 ...
TheFutureIsQuant's user avatar
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0 answers
1k views

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 ...
Winnie's user avatar
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1 vote
2 answers
180 views

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 ...
bng's user avatar
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1 vote
0 answers
91 views

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 ...
Ice Tea's user avatar
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0 answers
380 views

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 (...
Goo Gle's user avatar
  • 113
0 votes
1 answer
1k views

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 ...
apocalypsis's user avatar
2 votes
0 answers
152 views

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 ...
Conductor's user avatar
3 votes
2 answers
569 views

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 ...
user avatar
2 votes
1 answer
2k views

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, ......,...
GloBag578's user avatar
-1 votes
1 answer
262 views

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) ...
APMATH24's user avatar
0 votes
1 answer
725 views

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 ...
user61297's user avatar
0 votes
0 answers
92 views

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 ...
KT8's user avatar
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3 votes
0 answers
341 views

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 ...
Hasek's user avatar
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1 vote
0 answers
185 views

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 ...
user avatar
2 votes
0 answers
58 views

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 ...
OneDayMemo's user avatar