Time to Expiration and Drift for Implied Volatility on Futures Options

Summary

The document asks which date should define time to maturity when calculating implied volatility for an American option that stops trading before its stated expiration. The accepted response says to use the time until the option expires, rather than the earlier final trading day. It also notes that the contract is an option on a futures contract, so the underlying’s pricing setup should use zero drift, as in the Black 76 framework.

The exchange illustrates the issue with an option whose trading cutoff and expiration date differ, but it does not give a worked calculation, discuss exercise or settlement conventions, or compare models. The guidance is therefore concise and tied to the stated futures-option context. Applying it in practice still requires matching the model inputs and time convention to the contract’s actual terms.

Key ideas

• For the stated implied-volatility calculation, maturity runs to the option’s expiration date.
• An earlier last trading day does not replace expiration as the time-to-maturity input in the answer’s guidance.
• Options on futures are priced with a zero-drift underlying setup, such as Black 76.
• The document gives brief guidance rather than a numerical example or model comparison.

Tags

# Implied volatility for American options- time to expiration?


# Implied volatility for American options- time to expiration?












I am trying to compute the implied volatility of the OBM contract (on Euronext), using R, and I was wondering if, for the time to maturity, I should put the time until the contract expires or the time until the last trading day of the option. There is a difference.. For example : an option expiring on the 10th of March can be traded until February the 15th of the same year.

Thank you in advance

## Answer by Antoine Conze (score 2, accepted)

https://quant.stackexchange.com/a/42433

Volatility time to maturity should be until the option expires. Also be careful that these are options on futures so pricing should be with zero drift for the underlying (see e.g. Black 76 formula).

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.