volatility smile / volatility calculation

maybeoneday · January 8th, 2003, 9:07 am

Hi,If i know the implied volatilty of a strike, would it be posible for me to calculate the other strike volatilities?for example : if i know that actual volatility of a strike lets say 100 is 0.35. Is there any way i could calculate the implied volatilities of strike 110, 120, 130 without actually knowing the option pricesthanks

reza · January 8th, 2003, 11:08 am

depends on your assumptions and modelI suggest you take a look at the thread "Stochastic Volatility Models"it will give you some insight

orangeman44 · January 8th, 2003, 7:28 pm

In a similar line, if I know implied vol of the index, can I establish a relationship between impliedVar(stock)=alpha+beta*impliedVar(index)?How about VolSkew(stock)=alpha+beta*VolSkew(index)?What kind of problems can we run into?

orangeman44 · January 8th, 2003, 10:16 pm

Dear Reza,On Vol swap thread you mentioned a paper by Canadian professors(I cannot find the post). How is their approach different from yours or is that an empirical verification of yours.Thanks.

reza · January 9th, 2003, 12:00 am

hi,it is not differentthey use the same method applied to a different set of data

Sofiane · January 9th, 2003, 8:06 am

hey orangeman,If ind very interesting the attempt to link theoretically the skew index and the skew of the security...the questionis to think about a relation between the skew of a given portfolio (say the CAC) and the skew of its componenents? Are there many studies on this, im not sure!

NewNumberTwo · January 9th, 2003, 8:56 am

The current wisdom on the CBOE is the following:The index (say SP500) shows a declining smirk (a declining skew if you want) The individual stocks have higher implied vol with a smile pattern (larger on the extremes)

Sofiane · January 9th, 2003, 9:08 am

ok newn2 ! do you have any explanations?

mencey · January 9th, 2003, 3:58 pm

If the index rise the ATM volatility will go down, so I will be willing to sell OTM calls delta neutral. About the single stocks,..... there is still a way to cheat the customers

tonyc · January 11th, 2003, 4:16 pm

QuoteOriginally posted by: mencey . . . About the single stocks,..... there is still a way to cheat the customers Huh? why would individual stock options be a "cheat the customer" proposition vs index options?

mencey · January 13th, 2003, 8:13 am

because the diferences in the call curvature (at least in the european markets)