Thanks. As an amateur retail, I find neither BSM or binomial tree easy to use going in reverse: using historical option data to compute the greeks eats up lot of computer processing time on my MacBook laptop using excel.
Do you include 0 DTE Options in your Reports? How are those priced? Especially on 0 DTE Greeks seem to be all over the place at the brokerages, might be useful to have one reliable source to gauge prob/have a correct Delta.
We use percentage of a day starting at 95% at the open and 5% at the close. Pricing models generally don't work with 0 DTE.
Utilizing your "strike slope" + "derivative" methodology is probably an effective way to generate vol curves for illiquid expirations, or large areas of a smile missing bid/asks. Why don't you just use more reliable OTM IVs vs ITM IVs, which many MM's and mass quoters won't make markets in due to the delta risk?
VolSkewTrader Yes, I should clarify. We create a slope & derivative not to create our smooth market values but to create parameters for comparison to other months in the same security and to other securities. Our smooth market values process starts with a process akin to a cubic spline and then this spline is adjusted to strike IVs in a localized methodology. This process creates a very accurate theoretical values to the market bid-ask, being in between ~99% of the time. After the SMV process we then calculate a slope & derivative. This is an intricate process developed over many years and with much trial and error. It is a bit tedious to explain but if there is interest and when I have time I can get into the process a bit more.
If you don't mind sharing, whats a margin of safety you are going with when doing a comparison on IV and you find Volatility worth of Price Discovery in percentage term? 5/10/20% undervalued?