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Estimating Volatility Surfaces for Unlisted Index Options

Article Quant Q&A · Author: PBD10017
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Summary

The document asks how a broker might price European options on an index that has no readily available listed option market. The trader has options at several strikes with a shared expiry, while the broker appears to use a volatility surface and a market data source supplies only historical volatility. The answer suggests that the broker may combine several inputs rather than rely on a directly quoted surface for that index.

Possible inputs include an estimated surface derived from the index’s historical returns, returns or implied volatility from comparable indexes, and the broker’s existing inventory. The response points to approaches for deriving surfaces from return data, but the excerpt does not explain those methods, provide calculations, or show evidence for which inputs the broker actually uses. These are therefore plausible sources of an estimate, not a confirmed account of the broker’s pricing process.

Key ideas

  • A broker may estimate a volatility surface when direct option quotes for an index are unavailable.
  • Historical returns of the target index or comparable indexes can inform an estimated surface.
  • Implied volatility from similar indexes and the broker’s inventory may also affect pricing.
  • The excerpt offers possible inputs but does not establish the broker’s actual methodology.

Tags

OptionsVolatilityDerivatives pricing
Full text
# Is it possible to find / estimate the volatility surface of non-listed index options?


# Is it possible to find / estimate the volatility surface of non-listed index options?












I have 3 QNET options (european, 2 puts, 1 call, all same expiry, different strikes) that the broker is pricing clearly off a volatility surface. Bloomberg only carries historical volatility and I assume the broker is pricing this off quotes.

## Answer by onlyvix.blogspot.com (score 2)

https://quant.stackexchange.com/a/26086

Yes, your broker could have used one or combination of many factors: estimated volatility surface from historical returns of your target index, historical returns of similar indexes, implied volatility of similar indexes, existing inventory,etc. Check out these two approaches to deriving surfaces from returns starting slide 14

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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