How to recalculate "risk free rate" for differnt DTE

Don't fall into the trap of viewing the numbers that Black-Scholes spits out as being "accurate". All of these models are just that: models. They aren't reality but convenient fictions created to try to understand the markets. Price, volume, statistical volatility, interest rates can all be directly measured - they're real. But figures like implied volatility are *implied* i.e. not a directly measurable quantity.
Don't get hung up on being as precise or accurate as possible.
 
stevegee58 said:
Don't fall into the trap of viewing the numbers that Black-Scholes spits out as being "accurate". All of these models are just that: models. They aren't reality but convenient fictions created to try to understand the markets. Price, volume, statistical volatility, interest rates can all be directly measured - they're real. But figures like implied volatility are *implied* i.e. not a directly measurable quantity.
Don't get hung up on being as precise or accurate as possible.
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Firstly, it's better than nothing... Secondly, these are quantities that help one's intuition to make more accurate decisions (that's true, empirically).
 
My view on the interest rate for option trading: it doesn't matter. Compared to volatility it's effectively noise.

Detailing: there are actually two rates. A market average, which you use in order to derive the implied volatility. And your own borrow rate, according to Black Scholes fundamentals.

My own rate is zero. I trade my own money and I don't charge myself interest on that. If the market rate would be in the two figures range, then solely being able to price my options at zero interest would be enough to make juicy profits - since I already get the vol quite right.

But the market interest is so small that my edge on interest rate vanishes and all it matters is the vol.

And yes, dividends don't matter either - call it another heresy of mine.
 
Killing yourself over fitting the yield curve to the Bloomberg reference in order to use that with options trading is like interviewing people about JVM memory optimization and lambda generic mixins and then having them do CRUD Spring MVC form entry.
 
Aquarians said:
My view on the interest rate for option trading: it doesn't matter. Compared to volatility it's effectively noise.

Detailing: there are actually two rates. A market average, which you use in order to derive the implied volatility. And your own borrow rate, according to Black Scholes fundamentals.

My own rate is zero. I trade my own money and I don't charge myself interest on that. If the market rate would be in the two figures range, then solely being able to price my options at zero interest would be enough to make juicy profits - since I already get the vol quite right.

But the market interest is so small that my edge on interest rate vanishes and all it matters is the vol.

And yes, dividends don't matter either - call it another heresy of mine.
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This logic isn't altogether correct, if:
a) you mark-to-market; and/or
b) the concept of "opportunity cost" applies to you

Still, I agree that it's largely an interesting, but philosophical point.
Aquarians said:
Killing yourself over fitting the yield curve to the Bloomberg reference in order to use that with options trading is like interviewing people about JVM memory optimization and lambda generic mixins and then having them do CRUD Spring MVC form entry.
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Simple linear interpolation is trivial. Hardly falls into the "killing yourself" category.
 
>> Simple linear interpolation is trivial. Hardly falls into the "killing yourself" category.

Try explaining that to the boss who also trades $10M swaps using the same curve.
 
And try explaining that to the hedge fund who only employs a single quant, that is me, and he isn't even recognised as a quant because everyone thinks this stuff is just some monkey typing in a formula.
 
Aquarians said:
>> Simple linear interpolation is trivial. Hardly falls into the "killing yourself" category.

Try explaining that to the boss who also trades $10M swaps using the same curve.

And try explaining that to the hedge fund who only employs a single quant, that is me, and he isn't even recognised as a quant because everyone thinks this stuff is just some monkey typing in a formula.
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Sorry, I don't get this...

I trade swaps and I think simple linear interp is often the most sensible thing to do in a professional context, as well.
 
Well then most probably you don't (really) trade options, or else you would know there's a catch.

But good luck with what you're doing!
 
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