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Questions tagged [volatility-smile]

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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 ...
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1answer
564 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 ...
3
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1answer
254 views

Mixing Black Scholes with SABR

I am new to the whole concept of stochastic volatility so I am experimenting with option pricing. I think the concept is really difficult to understand / grasp. I was wondering if the following ...
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0answers
39 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
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1answer
75 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 ...
4
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1answer
201 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 ...
2
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0answers
32 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?
2
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2answers
74 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 $...
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3answers
220 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
2
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0answers
47 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 ...
4
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1answer
119 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 ...
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1answer
66 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 ...
4
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4answers
958 views

Trading spot volatility

I am reading a paper that very briefly talks about some volatility arbitrage strategies. It's so brief that I do not exactly understand how it works. It says one of the strategy is based on "short ...
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0answers
70 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 ...
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33 views

Is the implied volatility surface relative or stationary?

Do different strike values of options attain their volatility value dependent on their % distance from the ATM price continuously, or is the volatility surface stationary during a single day?
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3answers
3k 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, why do we hear sometimes "being long a long ...
4
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1answer
147 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 ...
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2answers
135 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 ...
2
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1answer
248 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
251 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, ...
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0answers
223 views

Mixed local-stochastic volatility model in Quantlib

At a conference the speaker mentioned that it is a standard approach today to use a mix of local and stochastic volatility model in equity, FX and interest rates. Can you please suggest the most ...
2
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0answers
60 views

The Free Boundary SABR: Natural Extension to Negative Rates

In the paper by Antonov, Konikov and Spector An alternative approximation for the SABR model is presented. I'm interested to implement the formula for the ATM swaptions implied volatilities in the ...
4
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2answers
1k views

Sticky Strike or Sticky Delta

Given market tick data for a single tenor for a futures and a set of options on the futures, how can I say if the IVs in the market at this point is sticky strike or sticky delta? I was trying to ...
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0answers
91 views

Produce volatility smile/skew with G2++ model

Suppose I have a G2++ short rate model: $$r(t)=x(t)+y(t)+\phi(t), \quad r(0)=r_0$$ with $$dx(t)=-ax(t)dt+\sigma dW_1(t), \quad x(0)=0$$ $$dy(t)=-bx(t)dt+\eta dW_2(t), \quad y(0)=0$$ $$d\langle W_1,W_2\...
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1answer
73 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 ...
7
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0answers
262 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 ...
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3answers
419 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 ...
4
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1answer
425 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 ...
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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
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2answers
476 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 ...
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0answers
70 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 ...
7
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2answers
690 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 ...
2
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1answer
62 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 ...
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0answers
99 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 ...
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2answers
301 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 ...
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1answer
107 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?
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2answers
634 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 ...
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2answers
582 views

In Dupire's paper, why is $(S_t, t)$ in the $(K, T)$ space?

I'm new to local volatility model. From Dupire's paper and most of the textbooks, they derived the local volatility $\sigma(K, T)$ in the $(K, T)$ (i.e., strike and maturity) space, from call prices ...
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1answer
357 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 ...
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2answers
1k views

For which instruments performs SABR/LMM better than LMM?

For which class of instruments the SABR/LIBOR Market Model does perform better than the classical LIBOR Market Model? The LIBOR Market Model The LIBOR Market Model — also known as Brace, Gatarek, ...
4
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1answer
560 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=...
5
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1answer
576 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\...
1
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1answer
314 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.
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2answers
1k 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 ...
7
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1answer
205 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 ...
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1answer
418 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
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1answer
517 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 ...
7
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1answer
2k views

QuantLib: Black / BSM processes and pricing via volatility surface. Different results?

I start this question with a couple of C++ functions that will be useful to show some results. So start your Visual Studio C++ Express or Ceemple or whatever you want and copy & paste this: ...
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1answer
51 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 ...
0
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1answer
161 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). ...