Why can't I set volatility higher than 0.9999?

Modified on 2022/01/13 09:07 by Rob Rrickson (CTS) — Categorized as: Uncategorized

Historical volatility is expressed as an annualized value. This works best for mid-term expirations. Very close to expiration and beyond one year to expiration the pricing models lose relevance to volatility. There are models called leap models that, arguably, provide more accurate results in these cases. Without a leap model, as DTE and volatility inputs reach extremes, the model produces more and more incorrect values for Greeks. This is a function of the mathematical model, not our software. The model is meant to serve as an approximation for derivatives that fit under a certain set of parameters and is unable to work effectively for all scenarios. All models we currently offer use annualized volatility and suffer the same limitations. We are exploring the integration of a leap model into our software to cover situations such as this.

That being said, some programs allow volatility to be over 100% and do not have a leap model. We believed from the outset that the breakdown of the integrity of Greek calculations with this elevated volatility level is more detrimental to users than the inability to price high volatility wing strikes. However, we are actively investigating all possible alternatives and we are working to build the most accurate models so that our users are prepared in every situation.

Bachelier Model¶

You can now set your volatility higher than 0.9999. To do this you need to open your Model Management, then click on the model tab and change your model to Bachelier, refit your series, click apply, then click ok.