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I notice in some thread discussions, warming up is said to be needed for greeks calculation. I'm not able to understand why this is the case. Can someone help me out?
My understanding is that for example Black–Scholes model, we need risk free rate, implied vol, strike price, the market price of underlying, and maturity to calculate option price. The only things that need to be calculated are rate(from yield curve) and vol, however, these are calibrated from the current market. To calculate greeks, what we need to do is just bump each corresponding input by 1 unit amount and apply the bs model again, I cannot see where we need more than the amount of data already available in the market at the current time point to calculate greeks.
Also, can someone point me to the code where the yield curve and vol surface is calibrated? I was told in another thread that these are done using quantlib.
Varad Kabade
Hi Xi.J.L,
The pricing models need to be warmed up to compute the Greeks.
The value of Greeks and Implied Volatility are calculated using the QuantLib library, so it is due to their requirement. Note that BSM assumes risk-free rate and volatility of the underlying asset are known and constant. At the moment, we cannot override it to add a constant volatility model.
Best,
Varad Kabade
Xi.J.L
Hi Varad,
thanks for your answer. I am aware of that and I have used quantlib for some fix income stuff before as well. it's just that I don't see any reason that they require more than the current market price to calculate implied volatility. Otherwise, it shouldn't be called implied volatility. It is implied since it is a one to one relationship with market option price. Given option price, yield curve(risk free rate), strike price and expire you should be able to back out implied volatility for that specific strike and expiry by using some simple solver like Newton's method. Could you please correct me if I'm wrong?
I wonder if QC is using realised volatility instead? so that the warm up would make sense. However, that raised the question of if the pricing with a realised volatility is correct which further raised the question of if the greek in qc is correctly calculated? Is that the convention of equity options pricing? if so please ignore above questions?
Yayaya
I really think Xi.J.L is correct. QC may use realised volatility for greek computation which may not be correct unfortunately, because QC's option greeks are sometimes quite off.. Especially in live trading, the greeks from QC and greeks from IBKR are totally different.... If possible please if anyone can investigate. Thanks QC for this amazing platform!
Xi.J.L
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