Hail Mary for volatility surface derivation from 30DTE IV value
- Thread starter stepandfetchit
- Start date
This thread appears to have jumped the tracks!
Thanks anyway for the responses.
Thanks anyway for the responses.
LOL thanks for showing your incredible understanding of vix
https://www.cboe.com/micro/vix/vixwhite.pdf
Are you really a derivatives trader, Sam? Or do you just play one on elite?
surf
cdcaveman :
Ouch! I will attempt to restate my objective differently.
With an option pricing model, such as Black&Sholes (ignoring dividends for now), It is possible to fairly accurately determine the price of a specific option contract, given you have some information that is readily available, PLUS the "volatility" of that specific option. The rub is, you never really have that "volatility" value, so most will "approximate" by some method. <-- I expect you agree with this!
For some instruments, such as RUT and SPX (which are my primary interests anyway), I am developing a process for "approximating" the IV for each contract lying at strikes between 20 and 80 delta (negative 20 & 80 for PUTs), to an accuracy of BETTER than 50% of the "true Implied Volatility" by taking into account the VIX value for SPX and the RVX value for RUT and the work I am doing on fitting to characteristics common to RUT/SPX behavior of IV with moneyness and time to expiration of the options. <-- I expect you also agree with this, as you have done some work here. (My use of the term moneyness is fairly loose. I currently use ln(strike/underlyingprice) to represent moneyness, which is has been adequate so far)
I suspect, the accuracy can be improved close to 5-10% for the mentioned Deltas, given some additional work, which I may chose NOT to do.
I understand that it would be far less effort to merely purchase the option pricing data, and use it directly. I have other reasons to purse this approach, rather than what seems to be the easy path of purchasing the data.
I don't really need anything, just curious if others have done this, and if so it would be interesting to compare notes on how we each addressed specific issues.
Ouch! I will attempt to restate my objective differently.
With an option pricing model, such as Black&Sholes (ignoring dividends for now), It is possible to fairly accurately determine the price of a specific option contract, given you have some information that is readily available, PLUS the "volatility" of that specific option. The rub is, you never really have that "volatility" value, so most will "approximate" by some method. <-- I expect you agree with this!
For some instruments, such as RUT and SPX (which are my primary interests anyway), I am developing a process for "approximating" the IV for each contract lying at strikes between 20 and 80 delta (negative 20 & 80 for PUTs), to an accuracy of BETTER than 50% of the "true Implied Volatility" by taking into account the VIX value for SPX and the RVX value for RUT and the work I am doing on fitting to characteristics common to RUT/SPX behavior of IV with moneyness and time to expiration of the options. <-- I expect you also agree with this, as you have done some work here. (My use of the term moneyness is fairly loose. I currently use ln(strike/underlyingprice) to represent moneyness, which is has been adequate so far)
I suspect, the accuracy can be improved close to 5-10% for the mentioned Deltas, given some additional work, which I may chose NOT to do.
I understand that it would be far less effort to merely purchase the option pricing data, and use it directly. I have other reasons to purse this approach, rather than what seems to be the easy path of purchasing the data.
I don't really need anything, just curious if others have done this, and if so it would be interesting to compare notes on how we each addressed specific issues.
You plug in the market price backwards into the equation to spit out implieds... Meaning given is price solve for vol... Your talking about plugging in a vix index number into BS and see what price by u get??? Is that what your saying..... If it is... Because vix index is a 30 day running average over the strike space of spx.. You will not get the same price of an option at any particular static expiry... Correct me with what your thinking
cdcaveman:
Darn! Apparently my thoughts are not propagating thru the words. NO!
1) "You plug in the market price backwards into the equation to spit out implieds... " <-- Given access to the data, this can be used to determine what the actual "IV" is for each option. This method is being used to quantify the accuracy of my results.
2) "Your talking about plugging in a vix index number into BS and see what price by u get??? Is that what your saying.." <-- NO! This statement suggests IV = VIX for the specific option, which is false. (some may use this as a first order approximation, however)
In my prior post, I inserted "<-- I expect you agree with this" in two places. Can you confirm that you agreed? This will help to close the gap on communication.
For SPX options, there is a function, say g(VIX,Price,Strike,DTE,PUT or CALL) that will return an "IV" number within 50% of the true "IV" number given the Strike is in the 20-80 delta range. I am developing this function. Use this function in place of the "Volatility" input to the B&S model.
Darn! Apparently my thoughts are not propagating thru the words. NO!
1) "You plug in the market price backwards into the equation to spit out implieds... " <-- Given access to the data, this can be used to determine what the actual "IV" is for each option. This method is being used to quantify the accuracy of my results.
2) "Your talking about plugging in a vix index number into BS and see what price by u get??? Is that what your saying.." <-- NO! This statement suggests IV = VIX for the specific option, which is false. (some may use this as a first order approximation, however)
In my prior post, I inserted "<-- I expect you agree with this" in two places. Can you confirm that you agreed? This will help to close the gap on communication.
For SPX options, there is a function, say g(VIX,Price,Strike,DTE,PUT or CALL) that will return an "IV" number within 50% of the true "IV" number given the Strike is in the 20-80 delta range. I am developing this function. Use this function in place of the "Volatility" input to the B&S model.
You've already been corrected by others on the specific point, but as a general suggestion -- don't flame people who understand the markets better than you do...