Marking implied vol surface daily with sticky strike and sticky delta

2018-03-16 19:02:46

Suppose that implied vol surfaces are calibrated once per month due to data restrictions (i.e. option data is only available at month end). How can a trading desk remark their vol surfaces on a daily basis by only observing the spot and time to maturity? I have heard of techniques such as sticky delta and sticky strike. How do those techniques work? When would one use one technique over the other?

These are introduced in the GS Note on Volatility Regimes. Oversimplifying (a good amount) they say that the surface will look the same based on strike or delta.

E.g.: sticky strike- if your spot price is 100 and the 80 put is trading at 20% volatility according to your surface, you will re-calculate the put price at 20% volatility with your new spot price (the vol per strike has not changed, even though the spot price and therefore the option price has). Sticky delta (more robust) would change the computation to include the new moneyness level, so after a 10 pt rally in

  • These are introduced in the GS Note on Volatility Regimes. Oversimplifying (a good amount) they say that the surface will look the same based on strike or delta.

    E.g.: sticky strike- if your spot price is 100 and the 80 put is trading at 20% volatility according to your surface, you will re-calculate the put price at 20% volatility with your new spot price (the vol per strike has not changed, even though the spot price and therefore the option price has). Sticky delta (more robust) would change the computation to include the new moneyness level, so after a 10 pt rally in spot would have reduced from 80% moneyness to 72%, so you would calculate the option price with your calibrated surface's 72% moneyness vol level.

    2018-03-16 21:24:26