Forums  > Pricing & Modelling  > Calculate volatility from straddle's price?  
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Total Posts: 125
Joined: Nov 2005
Posted: 2017-09-28 18:29

I understand how to take a bid in a call options and turn it into a bid in volatility terms. How do I take the straddle's bid price and turn that into a bid in volatility?

Will doing so be dangerous on expiry day?

Pointers appreciated, I was surprised not to see this discussed here or on quant.stackoverflow.


Total Posts: 125
Joined: Nov 2005
Posted: 2017-09-28 18:38

Phun's answer here was helpful: Quant.StackOverflow

I'm still interested in comments about expiry day.

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Posted: 2017-09-28 20:28
As that answers says, as a straddle only has 1 strike level involved the only implied vol to talk about in the markets I've familiar with is the implied vol for that strike.

The closer it gets to expiration the less meaning will thinking about it as implied volatility be. If you make it more extreme - you're 10min before expiration, do you care about implied vol, or do you care about the the distance to the strike and the jump risk?

I find it useful to think about what you'd want to charge if you had to be the seller of any optionality and why that is. So if you have to sell a straddle 10min before expiry, you probably care a lot more about the distance to the strike and the likelihood of a jump of that size over the next few minutes. Talking about implied vol in an annualized standard deviation perspective is pretty meaningless way to think about the risk you'd get short. You can still come up with some number to stick into some formula to come up with the actual price you wanted to charge anyway, but it's not very helpful way to reason about it on its own.

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Posted: 2017-09-29 15:33


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Posted: 2017-10-02 03:44
As T->0, both numerator and denominator ->0, making the expression undefined. Therefore volatility becomes meaningless, and you are better off thinking only in terms of jump risk, as Patrik says.

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