Javaheri's vol arb - implied vol question

momentumpartners · December 10th, 2009, 5:31 pm

Hi all, I am attaching a file here. I was wondering if anyone knows how to calculate this implied volatility concretely? Tks for your input,M -Edit (a few minutes later...) -----------------------------------Actually I am ok guys. Sorry about that.

Gmike2000 · December 10th, 2009, 8:26 pm

good try...i am not opening some random zip file from some random dude. sorry.

momentumpartners · December 10th, 2009, 8:30 pm

don't they screen email addresses for new members??it was only a gif or jpg file don't be too paranoid. I don't think a hacker would know Javaheri's book nor what implied vol is.

Gmike2000 · December 10th, 2009, 11:19 pm

ok you convinced me.so which one of the symbols are you referring to? if it is the last one, i am sure he defined it somewhere in his book...or i guess that is what is book is all about: inferring the "true" volatility to use based on empirical estimationif you are not sure, you can always hedge with the wrong implied vol. Grandmaster "P" has a paper on it and what the effect of using either vol is on your delta hedge returns.

momentumpartners · December 10th, 2009, 11:52 pm

thanks for looking at it! I dont know if you read the book but he describes in the last chapter a skewness trading strategy. He exhibits several plots that show the implied smile vs the "historic" smile and I am trying to understand what he means by historic smile. I think he defines it by the formula that I have attached. So let's put it this way... what do you understand by "historic smile"? Did he calibrate an SV model and got the smile from there and then compared it to the implied smile? Thanks for your help.

Gmike2000 · December 13th, 2009, 10:18 pm

I did not read the book, but I reckon he uses some econometric estimation methods to "measure" the historical moments of the returns distribution, or the parameters needed for some kind of SV model.The problem, in my opinion, is that you need too much data before you can be confident in your estimate of anything that goes beyond the 2nd moment. Even measuring the 2nd moment alone is tricky enough and most people get it wrong (but they are not aware of it). But I really have not read his book (yet) so I cannot comment on what he proposes.

momentumpartners · December 14th, 2009, 8:05 pm

thanks thats actually what he says!I think I understood what he meant by historic smile... I had skipped a few pages - sorry about that. Apparently he calibrates an SV model using the historic stock prices vs a calibration using options prices and gets two implied vol smiles that he compares to execute the arbitrage (if there's one i.e. if the smiles are different). The strategy looks interesting but I am not familiar at all with SV models... Have you ever heard about this kind of strategy?