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Using Return Volatility to Define OTC Option Moneyness Bands

Article Quant Q&A · Author: Chris N
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Summary

The document asks whether OTC derivatives markets use standard moneyness buckets, such as percentage ranges around the underlying price, and whether suitable bands vary by asset class. It also asks whether bucketed activity can serve as a proxy for changes in the implied volatility surface.

The brief response says there is no known formal convention and suggests treating options within roughly one standard deviation of returns over the time to expiry as at-the-money. This offers a volatility-scaled alternative to fixed percentage bands, since the relevant price range depends on both volatility and tenor. The answer is limited: it does not establish an industry standard, explain asset-class differences, or assess how reliably bucketed activity represents volatility-surface trading.

Key ideas

  • The response reports no known formal OTC moneyness-bucket convention.
  • It suggests defining an at-the-money region using about one standard deviation of returns over the option’s life.
  • A volatility-scaled range can differ from fixed percentage bands as volatility and expiry change.
  • The document does not assess asset-class conventions or the usefulness of activity buckets as a volatility-surface proxy.

Tags

OptionsVolatilityDerivatives pricing
Full text
# OTC Derivatives Moneyness Conventions


# OTC Derivatives Moneyness Conventions












When looking at the OTC Derivatives market, is there a standard moneyness convention that is applied? And if so, what is that bucketed approach? For example: 90%-110% for ATM, 70%-90%, 110%-130%, etc... Is there asset class considerations that would change the band structure?

Is this data useful enough with understanding the activity on the vol surface as a proxy data source?

## Answer by Jake Freeman (score 1)

https://quant.stackexchange.com/a/46749

I am not aware of any actual formal convention, generally though within +- 1 standard deviation of returns (over the time period to expiry) would be ATM.

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