A very nice open source implementation is available for free from alglib. This would be useful if you wanted something built into a code framework. Lots of control, ability to tune, etc.

<t>KMV is an option, but to the best of my knowledge it doesn't explicitly use vol skew in it's formulation, correct? I've worked with equity vol skew for some time and I thought it might be interesting to whether there was any predictive information that could applied towards default risk. Also, th...

<t>In Gatheral's book "The Volatility Surface", he proposes a reduced form model in Chap 6 from which the "hazard risk" (annual probability of a "jump-to-ruin") can be inferred from the skew of OTM puts. On page 82, he provides a worked example using the 3-month skew curve to estimate a the hazard r...

<t>I'm coming to this thread after a few years. However I thought my experience might be interesting to anyone who finds this discussion after struggling with the Hull, Nelken, White paper. I burned a couple of days trying to resolve equations 8 & 9 and somehow back-out the L and sigmaA values f...

<t>I'm coming to this thread after a large break (9 years?) However I thought my experience might be interesting to anyone who finds this discussion after struggling with the Hull, Nelken, White paper. I burned a couple of days trying to resolve equations 8 & 9 and somehow back-out the L and sig...

<t>One method to evaluate option trading performance is to decompose trading PnL by "greeks" (delta, gamma, vega, theta) according to the formula:dC = (delta * dS) + (1/2 * gamma * dS * dS) + (vega * dsigma) - theta + epsilonwhere dC is the change in the option's value, dS is the change in the under...

<t>My objective in seeking a fit is not to determine a theoretical volatility (I use a kernel-based smoother for that) but rather to generate an estimate of skew (dsigma/dK), which for technical reasons my kernel-based smoother does not generate efficiently. Skew is needed to plug into the "swimming...

<t>Thanks, Bouncer, appreciate the feedback.I've been using the polynomialfit method from alglib and I'm getting fairly useful results. However, picking the right degree of polynomials turns out to be fairly important. Too few and you end up with a systematic positive bias at the trough of the skew ...

<r>FWIW, a little investigation revealed alglib.net (<URL url="http://www.alglib.net">www.alglib.net</URL>) that seems to provide a fairly usable set of polynomial fit algorithms (including a native port to C#, score!). Until a different tool is conclusively shown to be better this looks like a good...

<t>I'm evaluating mathematical, robust techniques for fitting a skew curve to a strip of equal maturity option implied volatilities. Ideally, the technique should be robust in the face of poorly quoted strikes (i.e. a worthless option that's being quoted wide). Anyone have any suggestion on where to...

<t>Turns out there's another nit that took me a while to puzzle out. RUT options track the RUT index (RTY Index GO on Bloomberg), IWM track the related RU20INTR index (RU20INTR Index GO on Bloomberg). The difference is that RUT is "Price" weighted, while RU20INTR is "Total Return" weighted. In other...

<r>There's a much, much simpler way to trade forward implied vol - it's called a calendar spread. If you are long the Sep 100 Call, and short the Jun 100 call, you are essentially long the 100 strike over the Jun to Sep period - ie. the forward 3m implied vol. The volatility implied by the calendar ...

<t>We are now gearing up to add RUT index options to the book. Can anyone think of any reason why I can't treat the deliverable of these options as 1000 x IWM (1/10th RUT ETF) for delta hedging purposes? Obviously our clearing processes must handle these as cash-settled (market on open), European op...

Yes, that was my intuition as well. Thanks for the second opinion. My freshman-level calculus is a bit rusty.

<t>Using B/S as a starting point, I derived the sensitivity of delta to the strike price in order to resolve some pricing model issues with far OTM and ITM strikes. The formula I came up with is very similar to that for Gamma, except replacing the S with (-K):ddC/dSdK = -exp(-qt)*phi(d1)/K*sigma*roo...