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Simple heuristics for pricing VIX options

Author

Listed:
  • Juliusz Jabłecki

    (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland)

  • Ryszard Kokoszczyński

    (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland)

  • Paweł Sakowski

    (Faculty of Economic Sciences, University of Warsaw)

  • Robert Ślepaczuk

    (Faculty of Economic Sciences, University of Warsaw)

  • Piotr Wójcik

    (Faculty of Economic Sciences, University of Warsaw)

Abstract

The article presents a simple parameterization of the volatility surface for options on the S&P 500 volatility index, VIX. Specifically, we document the following features of VIX implied volatility: (i) VIX at-the-money (ATM) implied volatility correlates strongly with the volatility skew in S&P 500 options; (ii) VIX ATM implied volatility declines exponentially with options' time to expiry; (iii) a SABR-type model can be used to model the smile observed in VIX options. These observations lead to simple heuristics for quoting prices (in terms of implied volatility) of VIX options with almost arbitrary strike and expiry, obtaining values that are reasonably close to market levels.

Suggested Citation

  • Juliusz Jabłecki & Ryszard Kokoszczyński & Paweł Sakowski & Robert Ślepaczuk & Piotr Wójcik, 2014. "Simple heuristics for pricing VIX options," Working Papers 2014-25, Faculty of Economic Sciences, University of Warsaw.
    • Handle: RePEc:war:wpaper:2014-25
    as

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    File URL: http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP142.pdf
    File Function: First version, 2014
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    VIX; VIX options; implied volatility surface;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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