Need to convert monthly option price to weekly time frame

P

Pelagos

I'm looking to trade the Nikkei 225. My trading system requires me to use weekly option data as part of a solution. Unfortunately the Nikkie options only trade as monthlies. I need a formula that can correctly derive what the weekly price should be from monthly data at any given time, not just the last seven days of the monthly options life.
Thanks for any help.
 
This is an interpolation exercise...

First things first, do you know how to get the atmf strikes for the different expiry dates?

Secondly, how precise do you wanna be?
 
Yes, my problem falls into the definition of interpolation. I have live Osaka data, here is a quote from 11:30 local time.
January 15750 call price is 395

January 15750 put price is 465

Expires on February 13th, 2014.

What is most important is that I derive a price consistently from the formula. Greater than 90% accuracy is desirable, but consistent results matter much more.
 
OKI, fine...

As a starting point, you need to answer my first question. Do you know how to compute the correct atmf for NKY, given the dividend yield etc? This is the basic building block that you will need if you want to achieve any sort of accuracy.
 
Quote from Pelagos:
Yes, I am familiar.
More...
Brilliant, so that means you know how to obtain the atmf strike for any expiry!

That's a start. Next thing you need to do is to decide how sophisticated you wanna be about the interpolation of the implied volatility. At any given point in time, you have a full set of implied vols for a given expiry, say 1m. Your job is to take these vols and "migrate" the whole smile over to the 1w expiry. Now, the most trivial way to do this would be to just assume that your 1mVol(D) = 1wVol(D), where D is the delta of the option. I think this is a good starting point, so you should probs do that as the first step.

I hasten to add here that I am not an expert on equity or index options at all. I have done this lotsa times in my asset class, so what I am describing here is a generic approach. If anyone thinks that I am doing smth wrong, pls don't hesitate. Maybe, sle and atticus can comment if they think I'm barking up the wrong tree.
 
Please see attached sheet (by Kevin Schmit)

Get monthly vol from the chain, plot it in here and re-adjust the date. I'd say that making assumptions that monthly vol = weekly vol is a pretty broad assumption, but it depends what you're trying to accomplish.
 

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