Questions tagged [volatility-smile]

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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 ...
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1answer
70 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 ...
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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?
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2answers
70 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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0answers
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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 ...
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3answers
214 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
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1answer
65 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 ...
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1answer
114 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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0answers
66 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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31 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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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
131 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 ...
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1answer
247 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 ...
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1answer
245 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
218 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 ...
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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 ...
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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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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
196 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 ...
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1answer
72 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 ...
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0answers
255 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
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 ...
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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 ...
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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
98 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
292 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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1answer
252 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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1answer
560 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\...
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1answer
552 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=...
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1answer
304 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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1answer
351 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

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 ...
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1answer
201 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
414 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 ...
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1answer
513 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 ...
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2answers
474 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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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 ...
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1answer
652 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 ...
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2answers
629 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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1answer
2k 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 ...
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1answer
159 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). ...
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3answers
416 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 ...
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1answer
981 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) ...
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1answer
221 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?
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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 ...
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2answers
686 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 ...
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3answers
485 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?
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1answer
423 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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1answer
212 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 ...