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Choosing Cash or Synthetic Forward Prices for ETF Option Volatility Curves

Article Quant Q&A · Author: tesla1060
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Summary

The document raises a practical issue in constructing an implied volatility curve for ETF options during high-frequency intraday trading. Its premise is that option quotes may update faster than the ETF cash price, so calculating implied volatility from the lagging cash price could attribute some of the apparent volatility change to stale underlying data rather than to option repricing.

The question proposes estimating a synthetic forward from put-call parity and using the Black model instead of using the cash ETF price with Black-Scholes. It provides no answer, data, or comparison showing whether this adjustment improves the curve. The idea is therefore a hypothesis about synchronizing option and underlying prices, not a validated method. Applying it would also depend on reliable put and call quotes and appropriate assumptions about the ETF’s forward value and distributions.

Key ideas

  • A lagging ETF cash quote can distort intraday implied volatility inferred from faster-moving option quotes.
  • The document considers deriving a synthetic forward from put-call parity as an alternative underlying input.
  • It proposes Black pricing for that forward-based approach but does not establish that it is superior.
  • Quote synchronization and the assumptions behind put-call parity matter to the proposed calculation.

Tags

OptionsVolatilityDerivatives pricingHigh-frequency trading
Full text
# In building volatility curve for etf options, should I use synthetic forward price or cash price


# In building volatility curve for etf options, should I use synthetic forward price or cash price












Assuming option market moves faster than ETF cash price in intraday high frequency setting. That means at each time point, when implied volatility is calculated by black-schole model by using cash ETF price, that is a small portion of dIV (change of IV) is due to that ETF price hasnt caught up with option price.

So in this sense, I feel that if I want to build a volatility curve on etf, I should in fact use synthetic forward price from put-call parity and employ black formula?

Not very sure if my understanding is correct.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.