Which IV is correct?

B

BlackCat

I have being playing around with options strategies on IWM and I found some differences in the implied volatilities of the same option obtained from different sources.

Example:

Date: 11/21/2007
ETF: IWM Close price: 73.50
Option: IWM Feb 73 Put
Last Trade: 4.40-4.60
Implied Volatility:
Interactive Brokers OptionTrader: 36.49%
Morningstar Option Chain: 34.7%
Optionisics Option Chain: 33.57%

Can anyone explain these differences?
I have the feeling that I should trust IB - am I right?
 
I got 35.78% on Thinkorswim.:D

Different sources may be using different models, different quotes (some using bid, others ask or mid)...

Thinkorswim's default is mid-point and Bjerksund-Stensland model.
 
I agree MTE.

The deal here is that you must have your own criterion. I have find the IB service failing and giving clearly wrong data of IV.

This is very serious if you are trading volatility.

Furthermore all greeks are calculated using IV options. Therefore your position analysis and trading maybe are conditioned by wrong data and lead you losing money. Be care about it.

Sugar
 
Sorry for off topic post but you mentioned obtaining IV numbers from IB. I've been trying to figure out how to get that data from IB's Option Trader but no luck. Their tech support had no clue either :(

Can anyone spare a dime, errrr, some help?
Here or PM is fine. TIA
 
IB used to have it on TWS. IVs for every strike in every month. Then I think one of the upgrades took that out. So I figure since one day I just didn't have it. Yes, TIA to anyone who knows how to get it back.
 
Quote from jj90:

IB used to have it on TWS. IVs for every strike in every month. Then I think one of the upgrades took that out. So I figure since one day I just didn't have it. Yes, TIA to anyone who knows how to get it back.
More...
In OptionTrader Configure -> Option Chains. If Imp. Vol is not mentioned in Available Columns then click Show Disabled.
 
In OptionTrader Configure -> Option Chains. If Imp. Vol is not mentioned in Available Columns then click Show Disabled.
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Thanks for the suggestion but it's not there. The only choices faintly resembling IV are:

Imp. Vol % and Opt Implied Vol which sounds good but isn't... It's a 30 day forward prediction based on the past 2 expirations.

Any other thoughts?
 
Quote from spindr0:

Thanks for the suggestion but it's not there. The only choices faintly resembling IV are:

Imp. Vol % and Opt Implied Vol which sounds good but isn't... It's a 30 day forward prediction based on the past 2 expirations.

Any other thoughts?
More...
Opt implied Vol is a 30 day estimate indeed (which I’ve never used). However Imp Vol (%) is a per-contract IV calc based on current bid/ask average. I have it displayed right now in OptionTrader as well as on a regular trading page.

Are you logged in demo?
 
Hi

I wouldn't rely any of the vendor implied vol calculations, since it's so essential to option trading. You can easily program your own solver or even use the solver in Excel (though as a last resort as its incredibly slow).

I trade options to trade volatility not direction, so I always consider how I will need to delta-hedge the option position.

The way I've programmed my implied vol calculations is to consider if I want to be a market-maker or market-taker, as this determines how I will delta-hedge the position and consequently which underlying reference price I will use in the implied vol calculation.

Take a call option for example:

a) market maker perspective

i) implied bid vol => use underlying best bid price

Since if my option bid is hit (& I am now long delta) I will try to automatically delta-hedge by selling the underlying at the best bid

ii) implied ask vol => use underlying best ask price

Since if my option ask is lifted (& I am now short delta) I will try to automatically delta-hedge by buying the underlying at the best ask price

b) market-taker perspective

i) implied bid vol => use underlying best ask price

Since if I hit the best option bid price (& I am now short delta) I will try to automatically delta-hedge by buying the underlying at the best ask price

ii) implied ask vol => use underlying best bid price

Since if I lift the best option ask price (& I am now long delta) I will try to automatically delta-hedge by selling the underlying at the best bid price

Cheers
Peter
 
Quote from pkwumo:

Hi

I wouldn't rely any of the vendor implied vol calculations, since it's so essential to option trading. You can easily program your own solver or even use the solver in Excel (though as a last resort as its incredibly slow).

I trade options to trade volatility not direction, so I always consider how I will need to delta-hedge the option position.

The way I've programmed my implied vol calculations is to consider if I want to be a market-maker or market-taker, as this determines how I will delta-hedge the position and consequently which underlying reference price I will use in the implied vol calculation.

Take a call option for example:

a) market maker perspective

i) implied bid vol => use underlying best bid price

Since if my option bid is hit (& I am now long delta) I will try to automatically delta-hedge by selling the underlying at the best bid

ii) implied ask vol => use underlying best ask price

Since if my option ask is lifted (& I am now short delta) I will try to automatically delta-hedge by buying the underlying at the best ask price

b) market-taker perspective

i) implied bid vol => use underlying best ask price

Since if I hit the best option bid price (& I am now short delta) I will try to automatically delta-hedge by buying the underlying at the best ask price

ii) implied ask vol => use underlying best bid price

Since if I lift the best option ask price (& I am now long delta) I will try to automatically delta-hedge by selling the underlying at the best bid price

Cheers
Peter
More...
I understand your reasoning but aren’t you splitting hairs, especially with penny spreads? Meaning the difference in bid/ask delta showing up past the 3rd decimal? Is it worth the additional processor load (custom iterative IV calc) and consequent execution delay?
 
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