Swing option-implied volatility

Hendrik Kohrs, Hermann Mühlichen and Benjamin R. Auer ()
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Hendrik Kohrs: VNG Handel & Vertrieb GmbH
Hermann Mühlichen: VNG Handel & Vertrieb GmbH
Benjamin R. Auer: Friedrich Schiller University Jena

Review of Derivatives Research, 2025, vol. 28, issue 3, No 1, 44 pages

Abstract: 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.

Keywords: Natural gas; Swing option; Implied volatility; Least squares Monte Carlo; Root-finding convergence (search for similar items in EconPapers)
JEL-codes: C61 C63 G12 Q02 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11147-025-09214-7

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