correct approach to options functions and formulas

D

dematto

I wanted to create a program to analyze the options!

 taking the prices of options and calculate the evolution according to the passage of time or price movements

I was thinking of using the Black-Scholes formula but my problem is: how to properly consider the implied volatility (volatility smile) for each strike?

the program do a reverse to calculate the implied volatility from the listing price and keep that smile stored for any future changes in the underlying asset?
is correct to do something like this?
 
Only problem is, smile can also change with time and underlying movement. The way smile looks now will be completely different if ES goes down 100pts...

A sticky strike assumption seems to be best for ES etc. Paper is somewhere, god knows where...
 
Sounds great. Go for it. In order of complexity you could:

1) Calculate and graph the ATM implieds based on the midpoint prices to show a volatility curve across different expirations.
2) Calculate and graph most of the implieds based on midpoint prices and create a surface graph across strikes and expirations.
3) Show how curve/surface changes over time by connecting it to a rt (or snapshots) database of option chains.

1) and 2) can easily be done in excel. I am not even sure how you would implement 3).
 
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