To: dxPrice subscribers
We are pleased to announce the updates to the Black-Scholes model, which is used for the Implied Volatility and Greeks calculation in dxFeed.
Currently, the implied volatility is calculated at dxFeed the following way:
- The Model Free approach is used to calculate the theoretical prices for each option.
- Considering the identified theoretical prices for the option, the implied volatility is calculated using the Black-Scholes model.
- Greeks values are then calculated for the corresponding options’ implied volatility values.
dxFeed now applies Implied Volatility flattening logic for handling the metrics calculation of the deep out-of-the-money option metrics when the Black-Scholes model is applied.
Technical details
Deep out-of-the-money (OTM) options have penny prices (often even `0.00` on the trading monitors because of rounding). When the Black-Scholes model is applied to the Implied Volatility calculation of such options, the resulting values are significantly higher than they should be from clients’ prospective. One of the reasons for it is that the provided settlement prices for the deep OTM options are higher than the calculated theoretical prices.
Since the settlement prices are not available during the day, dxFeed applies the approach of Implied Volatility flattening. The approach is based on the identification of the two consecutive `0.00` bid prices for deep OTM options and using the preceding option’s Implied Volatility for the `0.00` bid options listed deeper.
Business rule
Once there are two consecutive `0.00` bid prices for the OTM options in the series found, then we take the Implied Volatility value calculated for the preceding option and apply it to all 0.00 bid options listed deeper it in the series. The algorithm is applied at each calculation of the Implied Volatility.
Effective date
New logic will be rolled out on February 6, 2023. No actions required by clients.
Please refer to dxFeed Help Desk if you have any questions or concerns.