Index option smile

cemil · July 11th, 2006, 2:50 pm

I would to estimate the volatility smile of the Eurostoxx50 for the pricing of OTM option. What models according to you is the best way?

Flare1 · July 11th, 2006, 9:48 pm

I think the best way is to first use an option analysis calculator to find out the implied volatilities for the options. After you have a nice data set for the vols across your smile (5, 10, 15% in or out of the money) you can see the behavior of the smile. From there look at the various skew types and see which skew most resembles the graph you plotted using your implied vols. It's most likely parabolic or hyperbolic.