Simple heuristics for pricing VIX options

Juliusz Jabłecki (), Ryszard Kokoszczyński, Pawel Sakowski, Robert Ślepaczuk and Piotr Wójcik
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Juliusz Jabłecki: Faculty of Economic Sciences, University of Warsaw; National Bank of Poland

No 2014-25, Working Papers from 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.

Keywords: VIX; VIX options; implied volatility surface (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2014
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http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP142.pdf First version, 2014 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:war:wpaper:2014-25

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