QuoteOriginally posted by: RedSniperImplied volatility is the current assessment of the market about the volatility of the underlying asset, given the parametric option pricing model used to calculate the implied volatility. Is it possible to determine an implied volatility of volatility from market prices of options in a similar way? in FX, the butterfly (long straddle, short strangle) is the convexity of implied vol and is a good representation of vol of voli dont know if this is true in equity as well, when you have a skew shape instead of a true smile

The view I've heard on IR vols is that they are log-normal, mean-reverting.To find the market-implied vol of vol, you can use the analytic SABR formula, which expresses vols across strikes as a function of the strike distance of the underlying rate from its a-t-m level, the a-t-m vol, the 'vol of vol' parameter, and a 'beta' parameter (beta is a measure of lognormality of rates: b=0 corresponds to rates being normal, b=1 to being lognormal).Then you optimize the 'vol of vol' and 'beta' parameters to minimize the fit errors to observed vols across strikes.

QuoteOriginally posted by: RedSniperImplied volatility is the current assessment of the market about the volatility of the underlying asset, given the parametric option pricing model used to calculate the implied volatility. Is it possible to determine an implied volatility of volatility from market prices of options in a similar way?I'm not being precise, but I would think that if you calculate implied volatilities of the same option with different maturities, and normalize them to the same time scale, then the variation between these numbers will tell you something close to an implied volatility of volatility.

Vol of vol relates to the option smile-if vol of vol increases (decreases), then the values of both o-t-m calls and o-t-m puts will increase (decrease) relative to a-t-m straddles.i.e. the higher the vol of vol, the more exaggerated or "convex" the vol smile.