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Vol. Surface
- Thread starter trilogic
- Start date
Nice charts.Hello..
Any coments regarding shape of different dates not strikes ?
But IMO it would be useful for outstanders if you did first comment your charts.
What hat are the highlights in them?
If you are using the data to look for mispricings as possible trading opportunities, you likely will not find it in the S&Ps. Possibly for contracts on individual securities, but even then, I doubt it. The low liquidity options will probably have wide spreads that make any potential mispricing unexploitable.
trilogic :
Nice graphs! I am curious why the (Vol surface graph) IV does not correlate with "moneyness". I expected a strike axis inflection. It seems the Vol Surface is from PUTs only! (just trying to understand what is presented).
IMHO: Regarding the Time to Maturity Axis... It seems to represent a weak and uncertain "contango". It would be interesting to see this graph at 1 week intervals to observe how the shape transforms. That may help to shed light on the significance of the near term DTE inflections.
Nice graphs! I am curious why the (Vol surface graph) IV does not correlate with "moneyness". I expected a strike axis inflection. It seems the Vol Surface is from PUTs only! (just trying to understand what is presented).
IMHO: Regarding the Time to Maturity Axis... It seems to represent a weak and uncertain "contango". It would be interesting to see this graph at 1 week intervals to observe how the shape transforms. That may help to shed light on the significance of the near term DTE inflections.
Vol surface analysis is very interesting stuff. First, to answer your question, those kinks you see in the term structure are fairly normal. They usually signal key events (Fed meetings, etc.) or monthly expirations which may result in increased volatility. The expirations immediately before do not contain these events as they will have expired already, so the increased vol is not priced into them. Look into how you calculate forward volatility for a bit more insight.
In terms of what the surface represents...great question. The most straightforward answer is that it is merely a snapshot in time of the various Black-Scholes implied volatilities corresponding to strike (or log-moneyness) and time to expiration. Since Black-Scholes is wrong and merely a quoting convention, some would say that the implied volatility surface by itself is meaningless save for providing a nice visual depiction of current market prices at a point in time (the surface will of course change 1 minute later).
The interesting question is: Could there be information "hidden" within the surface? Well there are TONS of books and papers written on this. There are all kinds of models: local vol, stochastic vol, jump diffusion, and mixes that all attempt to extract information from the IV surface (via calibration) in order to develop a pricing function as well as subsequent partial derivatives to calculate hedge ratios. The fundamental issue always comes down to how well a given model produces skews/smiles relative to those actually seen/realized in the market.
Again, people study this stuff for years. Some of the models are VERY mathematically intensive (usually developed by theoretical physicist types).
How complex you need to be is an important question to ask yourself. What kind of trader are you? If you just want to trade directionally with options, you don't need any of this stuff. If you want to trade volatility with exchange traded options, Black-Scholes should work just fine so long as you price and hedge the skew. If you get more complex, local volatility might be something to look into. But stochastic vol or jump diffusion is really more in the realm of exotic OTC options.
In terms of what the surface represents...great question. The most straightforward answer is that it is merely a snapshot in time of the various Black-Scholes implied volatilities corresponding to strike (or log-moneyness) and time to expiration. Since Black-Scholes is wrong and merely a quoting convention, some would say that the implied volatility surface by itself is meaningless save for providing a nice visual depiction of current market prices at a point in time (the surface will of course change 1 minute later).
The interesting question is: Could there be information "hidden" within the surface? Well there are TONS of books and papers written on this. There are all kinds of models: local vol, stochastic vol, jump diffusion, and mixes that all attempt to extract information from the IV surface (via calibration) in order to develop a pricing function as well as subsequent partial derivatives to calculate hedge ratios. The fundamental issue always comes down to how well a given model produces skews/smiles relative to those actually seen/realized in the market.
Again, people study this stuff for years. Some of the models are VERY mathematically intensive (usually developed by theoretical physicist types).
How complex you need to be is an important question to ask yourself. What kind of trader are you? If you just want to trade directionally with options, you don't need any of this stuff. If you want to trade volatility with exchange traded options, Black-Scholes should work just fine so long as you price and hedge the skew. If you get more complex, local volatility might be something to look into. But stochastic vol or jump diffusion is really more in the realm of exotic OTC options.
What type of positions are you putting on?
Very nice charts! Basically it's a 3D representation of how hard it is to make money trading options.
For example take your verticals; want to go long using call bull spreads? Then you need to overpay near the money for your longs and get underpayed out of the money for your shorts. If the price of the underlying moves in your favor very little happens to your price ratios, yes you made some money but it but was uphill battle.
Want to go out in time? Things smooth out a bit but the bid/ask spread widens considerably.
The study of "stickeyness" suggest the 3D chart stays nearly the same but it moves along the underlying price axis.
The Vix should correlate with the 30 day ATM and is a good reminder of how little we know beyond that.
For example take your verticals; want to go long using call bull spreads? Then you need to overpay near the money for your longs and get underpayed out of the money for your shorts. If the price of the underlying moves in your favor very little happens to your price ratios, yes you made some money but it but was uphill battle.
Want to go out in time? Things smooth out a bit but the bid/ask spread widens considerably.
The study of "stickeyness" suggest the 3D chart stays nearly the same but it moves along the underlying price axis.
The Vix should correlate with the 30 day ATM and is a good reminder of how little we know beyond that.