What Is a “Volatility Surface” and How Is It Used in RFQ Pricing?
A volatility surface is a three-dimensional plot that shows the implied volatility for all available options on a given underlying asset, plotted against both the option's strike price and its time to expiration. Market makers use the volatility surface to ensure consistency and accuracy when pricing an RFQ.
Any quote must align with the current surface to avoid being picked off. It is the core reference for calculating the fair value of any option derivative.
Glossar
Market Makers
Function ⎊ Market Makers in cryptocurrency, options, and derivatives markets actively provide liquidity by simultaneously offering to buy and sell assets, narrowing bid-ask spreads and facilitating efficient price discovery.
Strike Price
Reference ⎊ The Strike Price is the predetermined reference level set at the contract's inception against which the underlying crypto asset's spot price is compared at expiration or exercise.
Implied Volatility
Expectation ⎊ This value represents the market's consensus forecast of future asset price fluctuation, derived by reversing option pricing models using current market premiums.
Flat Volatility Surface
Calibration ⎊ A flat volatility surface in cryptocurrency options denotes a condition where implied volatility remains consistent across all strike prices for a given expiration date.
Volatility Surface
Calibration ⎊ The volatility surface, within cryptocurrency options, represents a three-dimensional depiction of implied volatility indexed by strike price and expiration date; its calibration involves determining the parameters of a stochastic volatility model to best fit observed market prices of options contracts, a process crucial for accurate derivative pricing and risk assessment.
Consistency
Framework ⎊ Within cryptocurrency, options trading, and financial derivatives, consistency denotes the predictable alignment of market behavior with established theoretical models and empirical observations.