The New Volatility Skew Model

Discussion in 'OptionVue Forum' started by garyw, Apr 27, 2018.

  1. garyw

    garyw Well-Known Member

    While I do not have OptionVue, I remain very interested in most work on "Volatility".
    In "", under "The New Volatility Skew Model", The following statement is made:
    1) More accurate fair values and greeks in the Matrix, as these calculations will be based upon projected volatility numbers that are
    much closer to each option’s current MIV.

    Aren't the "greeks in the Matrix" for T+0 (not projected into future)? I thought the "greeks in the Matrix" (specifically IV) were the "option's current MIV"!
    Stated differently: "Using projections of volatility for Matrix values (IV->greeks) is illogical." <-- since there is nothing to project.

    I do understand and agree on projections for volatility for T+n, but projections for T+0 (not so much).
    Last edited: Apr 27, 2018
  2. Marcas

    Marcas Well-Known Member

    You are right.
    I suppose confusion is result of imprecise use of language. I can guess that by Matrix they are talking about matrix generated for t+n lines, not Matrix taken from chains.
    Or they can mean they will do better job calculating IV and greeks which should in theory generate better t+n lines.
    Or something else.

    I wonder how one determine if new lines are 'better'.
  3. Kevin Lee

    Kevin Lee Well-Known Member

    Here's my understanding of how the OV IV skew works...

    Firstly, the projected IVs are derived from curve fitting the MIV data. In addition, if you choose "combined put/call skew", it will be reflected in the projected IV as well.

    After that, to draw the T+0 line, OV will have to calculate the projected P&L assuming the underlying is at different prices. For example let's say current SPX is 2600. The current projected IVs are good for calculating the P&L on the T+0 for just one point, ie at 2600. To calculate the P&L at 2610, OV will have to model how the IVs will be changed due to SPX moving up 10 pts. So at each point on the T+0 line, OV will have to modify the projected IVs according to their IV skew model.

    However, if user chooses EIOIO mode, then the IVs are assumed to be static along the T+0 line. That's how TOS draws their T+0 line. That's why the T+0 line for OV and TOS or ONE look different.

  4. garyw

    garyw Well-Known Member

    Thank you for your detailed and clear response.
    I did not recall "Prj. Vty" being available as a column in the Matrix. (My Bad).
    OptionVue's use of term "Projected" does NOT relate to "future" or a time related estimate as I incorrectly assumed. <--"Mystery has been solved!"

    Thanks to your response, I now better understand why OptionVue's T+0 line, and PnL may be incorrect!

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