Questions tagged [implied-volatility]
The volatility of the price of the underlying security that is implied by the market price of an option based on an option pricing model.
966 questions
0
votes
0
answers
49
views
Why do market-makers use the delta on the a-axis of the IV-plot? [duplicate]
I've been accepted as junior at an top MM-firm at the skin of my teeth mainly due to mistakes in simulated trading with pricing with an IV-plot I just failed to understand it. The plot is made of the ...
- 1
0
votes
0
answers
59
views
Calibrating a surface contago/backwardation futures
If the option's underlying are a futures $F_t$ contract where the cost of carry is $\\\$0$, and there is contago/backwardation occurring that is larger than the interest rate of T-bonds: $$\frac{F_t}{...
1
vote
1
answer
156
views
Volatility surface static arbitrage and SVI
I have a very simple question in regards to vol parametrization using SVI and static arbitrage definition.
Why we consider only butterfly spreads(convexity of option prices with respect to strikes) ...
- 33
0
votes
1
answer
393
views
Why do mathematical model prices still differ from actual market option prices
As a student of quantitative finance, I’ve been exploring the concept of implied volatility and came across a fundamental question regarding the persistent difference between actual market option ...
- 145
1
vote
2
answers
280
views
How to price vol for options on forwards when forward settlement does not match option expiry
This is a question about how to compute vol for non-listed options for OTC pricing
Say you have the following quoted options on commodity futures (option expiry/fwd contract settlement):
2 months / 2 ...
6
votes
0
answers
193
views
The emerging use of Optimal Transport theory to Implied Volatility surfaces
I've been reading up on the emerging application of OT to several areas of implied volatility surfaces, and I was looking for feedback on some of my ideas that I think are unique (haven't been ...
- 61
0
votes
0
answers
94
views
Pricing American Style Binary Options (One touch) Using European IV in BS
I’m pricing American style binary options (one-touch) using European option implied volatility within the BS framework and I am concerned about how well BS with its constant volatility assumption ...
1
vote
0
answers
50
views
Arb-free interpolation across bid/ask spread for ITM options
Let's say I have an OTM call has a bid/ask $C=\\\$40/45$, where the implied volatility is $\sigma=20/23\%$ and it's corresponding ITM put with the same strike and expiry is $P=\\\$2/6$. Obviously the ...
1
vote
0
answers
117
views
Why IV Surface modelled and not the underlying Probability Distribution?
There are three identical ways to define implied surface:
Volatility Surface $\sigma_{\text{IV}}(k,t)$, implied, risk neutral.
Call/Put Premium Surface $C(k,t)$, surface of raw prices.
Return ...
- 467
2
votes
0
answers
88
views
Jim Gatheral 's SVI model: implied variance or implied volatility
I am curious what do traders use when they implement the SVI model, is it log-moneyness vs implied volatility or implied variance?
I know that in the paper, Gatheral used implied variance. I am asking ...
- 31
3
votes
0
answers
292
views
Proof of Durrleman's condition for the implied volatility surface to eliminate butterfly spread arbitrage
I have seen many papers mention the Durrleman condition for an implied volatility surface as a means to eliminate butterfly spread arbitrage, yet none provide a rigorous proof that fully convinces me. ...
- 59
0
votes
1
answer
192
views
Volatility smile interpolation when using delta moneyness
I have an implied volatility smile in delta terms given by bloomberg:
...
- 1,255
1
vote
0
answers
119
views
Modeling Implied Volatility Curves for a European-style Market Where Naked Shorting of the Underlying is Prohibited
“In markets where shorting the underlying asset is prohibited (or significantly restricted), constructing implied volatility curves for trading may behave differently than in more standard markets. In ...
0
votes
2
answers
376
views
Why Are Deep In-the-Money Call Options Priced Below Intrinsic Value in Dividend-Free ETFs?
I have encountered an unusual situation in the market regarding deep in-the-money call options on dividend-free ETFs. According to standard option pricing theory, the price of a call option should ...
0
votes
1
answer
173
views
Transforming the volatility surface from strikes to delta
If I have a bunch of different strikes along with different expiries and their corresponding implied volatility, how do reconstruct this as delta and expiry vs IV?
Where I am confused is that you ...
- 119
1
vote
1
answer
388
views
Are there arbitrage possibilities on the volatility skew?
In the real world, it is observed that the BS model does not hold due to the constant volatility assumption.
Accordingly, we observe a volatility skew, where the prices of OTM options are higher/lower ...
- 141
0
votes
0
answers
102
views
Metric for volatility time series similarity - European swaptions
I'm trying to estimate the volatility surface of illiquid swaptions (say CHF) given hourly data (atm vol, skew, for different strikes) of other liquid swaptions (EUR, USD, etc.). Having the underlying ...
- 53
2
votes
1
answer
150
views
Articles on (asset-specific) covariance matrix estimation
As the title states, has there been any peer-reviewed articles or literature review on the empirical estimation of elements in the covariance matrix? I would prefer a paper showing some empirical ...
- 2,862
0
votes
0
answers
156
views
High risk-free rate on crypto options
I've been looking at options on crypto (on Binance specifically). Binance reports using r=10% to calculate their IVs, which seems really high to me. I took some option prices and tried to solve for ...
- 616
3
votes
0
answers
235
views
De-Americanization and Implied Volatility Slice, american options: Best Practices?
I’ve been exploring the challenges associated with the de-Americanization method for creating implied volatility (IV) slices from American options.
One key issue is that this method can result in ...
- 228
2
votes
1
answer
200
views
Why does IV smile imply a more "peaked" distribution than lognormal?
Below, Hull claims that a U-shaped volatility smile suggests that "both small and large movements in the [underlying] are more likely than with the lognormal distribution, and intermediate ...
- 183
2
votes
2
answers
145
views
Determining IV priced into convertible notes
I'm trying to determine the IV priced into convertible notes at the time they were issued. Ideally, using python.
Here are a list of the terms:
It is my understanding that for a simple convertible ...
- 21
1
vote
0
answers
60
views
How to derive the volatility of options PL (hedged) as a function of implied volatility and measured realized volatility
This is my first time asking a questions. Apologies in advance if I mess something up. If this happens, please let me know if I do and I'll try to fix it.
My question is regarding the equation Euan ...
- 11
10
votes
1
answer
455
views
Difference between Option-Implied Skewness/Kurtosis and Historical Realised Skewness Kurtosis
As the title states, what is the difference between option-implied skewness/kurtosis and historical realized skewness/kurtosis?
It is often the case that option-implied volatility is higher than ...
- 2,862
1
vote
1
answer
262
views
Caplet volatility formula
Consider an ATM caplet with maturity $T$ and delivery $T+\tau$.
In the book Interest Rate Models (Brigo and Mercurio), page 81, the authors define the model caplet volatility
as the unique value of $\...
- 222