3 ms·
Things like Black-Scholes (using past volatility of the underlying to model the probability distribution in the future) are often used by market makers to price
by pclmulqdq 1y ago
Things like Black-Scholes (using past volatility of the underlying to model the probability distribution in the future) are often used by market makers to price options, but the vanilla version never is.
- rybosworld 1y agoAny market maker pricing options with Black-Scholes won't be a market maker for long. Black-Scholes is just a customer-facing description of the option (i.e, it provides greeks that everyone can understand). But it isn't used as a starting point. In practice, MM will back out what the implied volatility is from current prices. Then a stochastic volatility model is calibrated against that. https://en.wikipedia.org/wiki/Stochastic_volatility https://en.wikipedia.org/wiki/Stochastic_volatility
- mcakes 1y agoNo - no market maker is using stochastic volatility. (L)SV is only used for exotics. Market makers use a tricked out Black Scholes where the 'secret sauce' is in how you apply the chain rule when you calculate the greeks.
- rybosworld 1y agoWould be curious to know more about this.