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Choosing Out-of-the-Money Options for Implied Volatility Surfaces

Article Quant Q&A · Author: memela
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Summary

The document asks whether to use calls, puts, or both when estimating an implied volatility surface, after observing that nearby-maturity call quotes have identical bid and ask values at out-of-the-money strikes. The response recommends using out-of-the-money options on both sides of the strike curve. These options are described as carrying the most information about the optionality component of price, so the practical selection is calls on one side and puts on the other, according to which contracts are out of the money.

The guidance is brief and offers no data comparison, fitting procedure, or treatment of stale or crossed quotes. It also does not address how to enforce put-call parity, filter unreliable prices, or interpolate across strikes and maturities. Thus, it gives a useful input-selection principle for surface construction, but not a complete volatility-surface methodology; market quality and quote reliability still matter.

Key ideas

  • Use out-of-the-money options from both sides of the strike curve when building an implied volatility surface.
  • Out-of-the-money contracts are presented as more informative about the optionality component of price.
  • Choose puts or calls according to which side of the curve is out of the money.
  • The recommendation does not specify quote filtering or the surface fitting method.

Tags

OptionsVolatilityDerivatives pricing
Full text
# Should we calculate the implied volatility surface with Put+Call?


# Should we calculate the implied volatility surface with Put+Call?












We have Sungard data (MarketPlace8), but for nearby maturities the ask-bid of the calls are all the same when we are out of the money (call), so should we calculate the implied volatilities of calls for strikes below S0 and the rest by puts ? Or all from calls ? Thank you very much.

## Answer by roz (score 2, accepted)

https://quant.stackexchange.com/a/50215

You should use the out of the money options on either side of the curve as they carry the most information about the optionality part of the price.

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