Smooth Futures Options Vol Surface in terms of underlying underlying

Discussion in 'Options' started by Kevin Schmit, Jan 16, 2017.

  1. Any pointers on construction. I'm not having a lot of luck on this. For futures where option expiries do not overlap (e.g. ES) I'm getting kinked surfaces (not smoothly increasing or decreasing over distant time). For futures where option expiries overlap (e.g. ED) I am getting different adjusted-to-implied-futures-underlyer curves significantly different for the same expiry (different underlying futures). Averaging among these still leaves an undulating surface along the time dimension.

    Just to be clear I am trying to construct an implied vol surface (delta-or-moneyness by time) in terms of implied vol of the futures underlying not options underlying (when options and futures expiries are coincident, should be the same).
     
  2. Kevin:
    I think there are multiple factors to account for (Assuming I understand you correctly).
    This is a non-trivial exercise. It may be helpful to simplify your approach to determine where the issue lies. Many people can guess, but you should be able to find for sure.
    I am still unclear precisely what you mean by IV of the Futures, but not of the Futures options.

    For a simpler task, consider doing the same for SPX (instead of ES), and first insure the issue with time does not exist there! -- If it does exist there, correct it with SPX first before tackling ES. -- I have done some work with this on SPX, but not ES.
     
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  3. JackRab

    JackRab

    Futures underlying / options underlying are the same re IV. Doesn't matter...

    If the options have the futures as official underlying, it's still the actual index that's the basis...

    Where are the 'kinks' at? is it between maturities? Show us your surface please?
     
  4. In which case, vol curves for two coincident expiries (e.g. for options on EDH17, option base ED, and EDH21 option base E4, both expiring 20170210) should be the same or at least have the same shape and be roughly parallel. This is not the case. Or if it is. then either my vol calcs are off or my marks are off. Mark I have on 20170113 for EDH17 atm call 98.875 is 0.0625 and for EDH21 atm call 97.50 is 0.13. Futures marks are 98.925 and 97.53.

    Between maturities with different underlying futures expiries but the same ultimate underlying index where expiries don't overlap. For example between ESH17 20170317 expiry and ESM17 20170331expiry. Not a really hard kink, just a reset in curves monotonically increasing in levels.

    I don't visually inspect the surfacs, just use them for constant maturity calcs such as level, slope, and curvature (anologous to atm straddle, 25d RR, and 25d fly), so I don't have any plots. Matplotlib doesn't work on my machines due to numpy dependency and I have never learned plotting in matlab or R. I will post a plot once I figure out how to get plotting working.
     
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  5. JackRab

    JackRab

    EDH17 exp 13 March 2017
    EDH21 exp 15 March 2021

    I don't have experience with eurodollar futures or options... but that seems like 2 different expiry dates to me...

    Also, do you fit your own curves? How is liquidity at later expiry dates?
     
  6. JackRab

    JackRab

    I don't really get what you're aiming at... what do you mean with overlapping expiries?

    So where is the big kink exactly? Or do you mean the gradual rise in IV when expiry is later and later dated?
     
  7. Those are the expiry dates of the underlying futures, the options in question both expire Feb 10th of this year. They settle in different futures, one in the March 2017 contract and one in the March 2021 contract. So the options expire on the same day. They show different implied vols. I am sure there is a good explanation, I just don't know what it is.

    I fit my own curves which I use to derive indicators used to model the and trade the outrights. I have been doing this on equities and index options for years. I just bought in backhistory of futures options since 2005 and want to test if the same metrics calculated on futures options would be useful to me.

    BTW, I used to buy these calced numbers (vol surfaces and metrics) from ORATS, but I found I could do it myself more cheaply after they moved to a new pricing model.
     
  8. JackRab

    JackRab

    Okay, got it...

    So Eurodollars being in interest rate product... longer dated futures should probably move a lot more correct? At least, so I would assume... similar with bund/bobl/schatz ratios...

    IV for bund is about 2.5x bobl, and 10x schatz.

    So, I would think something similar would be for the eurodollar futures... so if the 03-2021 future is more volatile than 03-2017... the IV's would be higher as well. '21 is about 3 to 4 x the '17?
     
  9. When, for example, an option on an "M" expiry future expires before one or more option expiries of an "H" future.

    Sort the list below by the third column, option expiry, and you'll see what I mean:

    EDH17,20170313,20170210
    EDH17,20170313,20170313
    EDM17,20170619,20170413
    EDM17,20170619,20170512
    EDM17,20170619,20170619
    EDU17,20170918,20170918
    EDZ17,20171218,20171218
    EDH18,20180319,20170113
    EDH18,20180319,20170210
    EDH18,20180319,20170310
    EDH18,20180319,20180319
    EDM18,20180618,20170413
    EDM18,20180618,20170512
    EDM18,20180618,20170616
    EDM18,20180618,20180618
    EDU18,20180917,20170915
    EDU18,20180917,20180917
    EDZ18,20181217,20171215
    EDZ18,20181217,20181217
    EDH19,20190318,20170113
    EDH19,20190318,20170120
    EDH19,20190318,20170127
    EDH19,20190318,20170210
    EDH19,20190318,20170310
    EDH19,20190318,20190318
    EDM19,20190617,20170413
    EDM19,20190617,20170512
    EDM19,20190617,20170616
    EDM19,20190617,20190617
    EDU19,20190916,20170915
    EDU19,20190916,20190916
    EDZ19,20191216,20171215
    EDZ19,20191216,20191216
    EDH20,20200316,20170113
    EDH20,20200316,20170120
    EDH20,20200316,20170127
    EDH20,20200316,20170210
    EDH20,20200316,20170310
    EDH20,20200316,20200316
    EDM20,20200615,20170413
    EDM20,20200615,20170512
    EDM20,20200615,20170616
    EDM20,20200615,20200615
    EDU20,20200914,20170915
    EDU20,20200914,20200914
    EDZ20,20201214,20171215
    EDZ20,20201214,20201214
    EDH21,20210315,20170113
    EDH21,20210315,20170210
    EDH21,20210315,20170310
    EDM21,20210614,20170413
    EDM21,20210614,20170512
    EDM21,20210614,20170616
    EDU21,20210913,20170915
    EDZ21,20211213,20171215
    EDH22,20220314,20170113
    EDH22,20220314,20170210
    EDH22,20220314,20170310
    EDM22,20220613,20170413
    EDM22,20220613,20170512
    EDM22,20220613,20170616
    EDU22,20220919,20170915
    EDZ22,20221219,20171215





    I mean when the gradual rise is interrupted by one lower curve (then rises again) when the underlying future (but not the underlying index) changes.
     
    Last edited: Jan 17, 2017
  10. You're right, that is probably the answer. I need to figure out a conversion formula for options on later futures expiries so that I can create a consistent curve going out to 2021. My experience with options on rates derivatives or even rates futures themselves is limited so I'll have to hunt around for the correct formula.
     
    Last edited: Jan 17, 2017
    #10     Jan 17, 2017