Im trying to get the correct value and deltas for eurodollar options, but empirically it seems that the Black Model for futures gives out values that are unstable whenever there's a change in the underlying. Anyone that has some experience with the same thing? Ideas?

What do you call correct value for ED options ? You may have access to Bloomberg closing prices for ED options for various strikes and then get the implied Black vol and all the parameters.During the day, you may talk to your broker who is able to give you both prices, iv and greeks.

What parameters are you feeding into the model?Keep in mind, ED Futures Options are american style so the black model may not completely apply. Since these options are daily settled, it is still permissible to use the black model, but depends what parameters you feed and for what purpose.

Gmike, Im using the Whaley aproximation for the American solution, still the ATM's should have similar prices, I've been trying to match the intraday option prices given by the CME but there seems to be a shift in the volatility whenever there's a movemente in the underlying, and the difference between the implied volatilities of the different strikes makes a very interesting smile with the Black Model.Thx anyways, if you have any ideas please let me know

Quixote,Are you sure you are accounting for the asychronous quotes between the option and the underlying? The options are far less liquid that the ED futures and do not trade with the same regularity. The "screen print" bid/ask option quotes often are stale as compared to the future. The screen quotes are usually indicative only and do not give reasonable implied vols during fast markets.To back out an implied vol one needs to know where the underlying was trading when the option last traded. The fact that the future's price has changed and that the option hasn't since traded doesn't give you any new information about implied vol.But yes, your observation about the smile is correct. There is a definite smile with the vols for the at-the-money options at the bottom.Another gotcha is with the deep out-of-the-money options. They trade for at least one tick, even if essentially worthless. Also, the trading in full ticks (as opposed to fractions of a tick) induces some distortion in the implied vols.

QuoteOriginally posted by: Gmike2000What parameters are you feeding into the model?Keep in mind, ED Futures Options are american style so the black model may not completely apply. Since these options are daily settled, it is still permissible to use the black model, but depends what parameters you feed and for what purpose.True and to add to Gmike's comment, the edfutures options can mostly be treated as what is called "soft-american". the exercise strategy is determined by the financing of the intrinsic value. If you are looking at the implied volatilities intraday you are going to see fluctuations as these options are being continuosly bought/sold and there is a supply-demand for them that may affect their prices (irrespective of what is going on in the underlying itself). [see stock pinning ]

I also would add that implied vols in percentage term (rate vol) are quoted as BS implied vols and are therefore based on log-normal models. Alas, when rates become low enough, the dynamic becomes more normal and people look at normalized vol (in bps/day term) to be a more stable parameters. Therefore, percentage IV increases when rates go down and vice-versa.Moreover, don't believe intraday quotes on Bloomberg and other systems. Pit traded options are updated only from time to time on electronic systems; quotes are often wrong. Closing prices are more reliable.

Hey stochastix, Can you explain more about normalized vol?

are the prices quoted on the EDSF page on bloomberg only for American style options?

BS implied vols are lognormal vols. In a sketchy way, a 30% IV on a 2% Eurodollar futures means that on a daily horizon, the standard deviation will be (30% x 2%)/Sqrt(number of business days in a year, usually around 250), which is 3.75 bps/day. This is referred to as normalized vol. You can look at historicals of recent years and observe that when Fed target was at 2%, implied vols levels were close to half of the implied vols when we got down to 1%. This means that normalized vols were more or less constant. This then hints that the underlying dynamic when rates become very low is more normal than log-normal (but then you have to deal with non-negative probabilities of negative rates, which could exist (nnote that JPY interbank market often trades negative due to regulations).And for the American/European debate... As far as I know, apart from extremely steep or flat money market curve conditions, the difference in pricing eurodollar options as american or european is negligible.

could you shed more lights on this "And for the American/European debate... As far as I know, apart from extremely steep or flat money market curve conditions, the difference in pricing eurodollar options as american or european is negligible" ? basically, I think that as eurodollar future has no dividend yiled, so the optimal exercising time of its option is expired time of the option? Am I correct?QuoteOriginally posted by: StochastixBS implied vols are lognormal vols. In a sketchy way, a 30% IV on a 2% Eurodollar futures means that on a daily horizon, the standard deviation will be (30% x 2%)/Sqrt(number of business days in a year, usually around 250), which is 3.75 bps/day. This is referred to as normalized vol. You can look at historicals of recent years and observe that when Fed target was at 2%, implied vols levels were close to half of the implied vols when we got down to 1%. This means that normalized vols were more or less constant. This then hints that the underlying dynamic when rates become very low is more normal than log-normal (but then you have to deal with non-negative probabilities of negative rates, which could exist (nnote that JPY interbank market often trades negative due to regulations).And for the American/European debate... As far as I know, apart from extremely steep or flat money market curve conditions, the difference in pricing eurodollar options as american or european is negligible.