They do, but they fit it onto the market. Options trading is all about relative value. Either you fit your model to statistical volatility of the underlying or you fit it to other options in the chain. The later is what market makers do since they primarily look to hedge against other options. Options volatilities are not a given fact that can be calculated by a model, they are subject to supply and demand. You need a model to compare two options and to evaluate if they are relatively expensive or cheap compared to each other
Interesting, looks like these folks are looking to solve similar issues, although they leave it vague how they'll do it: https://blog.lyra.finance/introducing_lyra/ Taking market based supply/demand, then, "Institutional Grade Pricing Mechanism"...
Read their whitepaper. LOL. It's gonna be great for traders looking to pick "liquidity providers" off. Can't wait for it to start working, but my prior is that it's DoA.
Ah, yeah, hadn't even seen the whitepaper. While nascent, their discord does have the devs trying to answer questions... I think it's interesting; They will have different pools per expiry. The strikes within an expiry will share a base IV and each have their own individual "skew ratio" multiplier. These IVs and multipliers increase by a fixed amount per "standard size" unit. To me this strikes me as quite gameable, but not sure the implementation...
Hi CyJackX, great post, I'm designing a decentralised crypto exchange to trade options, it seems we're aligned on the purpose, perhaps we could have a chat? I have initiated the process for pricing of the options across the range of strike prices and expiration dates, including long term expirations. thanks