Iceberg Options Solutions

Tag: Superfice di volatilià, superficie di volatilià, volatility surface, Market Maker Surface, Surfaces

With the new Market Maker of Iceberg prices do not move only according to the user's assumptions, but the volatility surface to which you want to refer

The internal Maket Maker acts in the same way in which the true Market Maker has already acted in the same market circumstances

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The tool Market Maker, accessible from the tab General of the strategy, allows to modify the volatility surface on which theoretical price are calculated. This lets you to know the price of deep itm or otm option(usually they aren't quoted) and you can build strategy when the market is closed.
The Market Maker of Iceberg also allows to change manually the volatility surface.

When you start the Market Maker system a window named “Underlying - Theorical Volatility Surfaces” appears. The surface that is displayed is the one that was used the last time. When you start a new Market Maker on an underlying for the first time the surface will be flat.

User, in this case, has three possibilities: to acquire market surface, to load a saved surface or to choose between default surfaces which are provided with the installation of Iceberg.

Each option is traded on the order book, which has a price that is exposed by the Market Maker (MM) which it is the institution that quote the instrument with poor little liquidity .
The option price depends on the following factors

• The exercise price
• The market price of the underlying asset to the option contract
• Time to expiry
• The volatility of the price of the underlying asset
• The short-term rate of return on risk-free
• The dividends expected during the life

which are objective.

But if you try to dial the price of an option with its calculator which you can find in our software for free Fiuto Beta you will find that the value remains at zero until you will not introduce the implied volatility which is the perceived risk by the market maker:

Changing this value the price of the option will change.

The implied volatility is an arbitrary value added by the Market Maker. The Market Maker will add more volatility on more risky options .
Whether we extract the implied volatility from the options for every strike and put them on a Cartesian plane we will see a smile or a skew.

Now, if we repeat the action with all expiry we will obtain a space in which we have the volatility surface

It takes to:

• have a theoretical option price in phases when the market is closed and the user desires to make strategic assessments through the appropriate instrument of What-IF;
• ensure that strategic plans that you put in place are valid by testing them in the section planning;
• study where there are more risk in order to speculate which direction can take the price. A simple example: if the call options have a higher risk than the put that mean that market maker price a possible up trend

Flat surface or green colored:

It indicates that the user has not proceeded to the acquisition of the volatility surface, so Iceberg is using the theoretical price calculated with an identical implied volatility for every strike and expire.

By clicking the button the user starts scanning the whole Chain Opzioni. Option prices are used for the creation of the surface. Depending on how many expires and strikes are available acquisition can be faster or slower. The user can choose how many strikes and expires to acquire.

By clicking the button the user can choose a surface among those that are available in the Iceberg. Each surface can be modified to suit user needs and saved.

if you click the “Edit Surface” button it opens the window “underlying - Theorical Volatility Designer” which allow to modify the volaility smile. you can raise or lower the entire curve or even just one of the strike in the graph.

You can select both the expire date and the number of strikes on which you want make the changes . The left mouse click allows to lift the strike volatility, while with right-click the strike volatility subsides.

When you make a change in the window “underlying - Theorical Volatility Surfaces” it is put beside the original view in order to permit an immediate conparison. The button Confirms the changes and then start to use the modified surface for the calculation of the theoretical price of the Option.The commands of the main window are available when the window “underlying - Theorical Volatility Designer” is closed.