Hi QC Community

We are pleased to announce a refactor in the calculation of Option Greeks!

Previously, the Greeks were calculated by the underlying volatility estimation which was depending on the selected volatility model of the underlying security. Not only the Greeks were not matching the ones from major brokerages like IB, but also failed to present the true sensitivity to the marginal change of time decay, volatility, underlying price, interest rate, and dividend yield. But from now on, the Greeks will be calculated by the approximated implied volatility instead of the underlying one. Since IV was regressed from the option price, the Greeks calculated could overcome the above-stated issue, reflecting the accurate rate of change of the option price by the above factors.

Moreover, it does not require "warm-up" anymore. As we can obtain the IV from the instantaneous option and underlying price, we have accurate Greeks values on the first slice of data received, which would only be available on the third day of subscription previously. This would be a big improvement if you are using Greeks for filtering.

Different pricing models would result in a slightly different estimated IV. To match the Greeks from IB, the below option pricing model will be used:

  • BlackScholes for European options,
  • BjerksundStensland for American options
  • Use the Fed interest rate as the risk-free rate (matched daily)
option.PriceModel = OptionPriceModels.BlackScholes();
option.PriceModel = OptionPriceModels.BjerksundStensland();

in which will also be set as default by now.

Note that the set volatility model for the underlying security will no longer impact the IV and Greeks, i.e. all underlying volatility models will result in the same Greeks' values, although the theoretical price is still dependent on that. Yet, it is still necessary to set up the underlying volatility model as it is needed for an initial guess of the IV approximation. If the volatility model is not defined or the defined one is not warmed up, LEAN will use Brenner and Subrahmanyam (1988) approximation.

Existing option pricing models cannot provide a closed-form solution in all situations, for example, when an underlying asset of an American put option has a discrete dividend before expiry. In this case, the IV and Greeks cannot be calculated from the option pricing model. A Black-Scholes calculator will be used to approximate the IV which might result in a slight discrepancy in the actual and estimated IV/Greeks values. American call options will not have this problem since it is not optimal for early exercise.

Please let us know if you run into any issues or queries. Enjoy and cheers!