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Swing option-implied volatility

Author

Listed:
  • Hendrik Kohrs

    (VNG Handel & Vertrieb GmbH)

  • Hermann Mühlichen

    (VNG Handel & Vertrieb GmbH)

  • Benjamin R. Auer

    (Friedrich Schiller University Jena
    University of Leipzig
    CESifo Munich)

Abstract

Motivated by the increasing interest of academics and practitioners in swing options, we develop a method for computing swing option-implied volatility. In a dynamic programming option pricing framework supplemented by an additive single-factor forward curve model, we propose to obtain implied volatility via a combination of Monte Carlo techniques and a root-finding algorithm. In addition to deriving the convergence properties of our approach, we apply it in an empirical study of volatilities implied by natural gas swing options. Here, we investigate their key features (related to seasonality and moneyness) and highlight their industry merits in delta hedging applications.

Suggested Citation

  • Hendrik Kohrs & Hermann Mühlichen & Benjamin R. Auer, 2025. "Swing option-implied volatility," Review of Derivatives Research, Springer, vol. 28(3), pages 1-44, October.
    • Handle: RePEc:kap:revdev:v:28:y:2025:i:3:d:10.1007_s11147-025-09214-7
    DOI: 10.1007/s11147-025-09214-7
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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