> ## Documentation Index
> Fetch the complete documentation index at: https://financecontext.com/llms.txt
> Use this file to discover all available pages before exploring further.

# Option Volatility Analysis

> Analyze option volatility by combining vol surface data, option pricing with Greeks, and historical price data to assess implied vs realized volatility

## What is Option Volatility Analysis?

Options are derivatives that give the holder the right (but not the obligation) to buy or sell an underlying asset at a predetermined price (the **strike price**) by a specific date (the **expiry**). The price of an option is driven primarily by **volatility** -- how much the underlying asset is expected to move. Higher expected volatility makes options more expensive because there is a greater chance the option will end up profitable.

**Implied volatility (IV)** is the market's forecast of future volatility, backed out from current option prices. **Realized volatility (RV)** is the actual volatility observed in the underlying asset's price history. The relationship between the two is the central question in options trading:

* If IV > RV: options are "rich" -- the market is pricing in more volatility than has actually been occurring. Selling options (writing puts or calls) tends to be profitable.
* If IV \< RV: options are "cheap" -- the market is underestimating volatility. Buying options tends to be profitable.

The **volatility surface** maps IV across different strikes (from deep out-of-the-money puts to deep out-of-the-money calls) and different expiries (from 1 week to 2 years). The surface shape reveals important information: the **skew** (risk reversal) shows whether downside risk or upside risk is priced higher, and the **term structure** shows whether near-term or far-term uncertainty is greater.

## Why It Matters

Volatility analysis is the foundation of every options trading strategy. Whether you are hedging a portfolio, speculating on earnings, or constructing structured products, understanding whether options are cheap or expensive -- and why -- determines whether your trade has positive expected value. The Greeks (delta, gamma, vega, theta) tell you exactly how your position will behave as market conditions change.

## Key Concepts

| Term                         | Definition                                                                                                          |
| ---------------------------- | ------------------------------------------------------------------------------------------------------------------- |
| **Implied Volatility (IV)**  | The market's expectation of future volatility, derived from current option prices                                   |
| **Realized Volatility (RV)** | Historical volatility calculated from actual price movements (typically close-to-close)                             |
| **Vol Premium**              | IV minus RV -- positive means options are expensive; negative means cheap                                           |
| **Delta**                    | How much the option price changes for a \$1 move in the underlying (ranges from 0 to 1 for calls, -1 to 0 for puts) |
| **Gamma**                    | How much delta changes for a \$1 move in the underlying -- measures the "acceleration" of the option                |
| **Vega**                     | How much the option price changes for a 1% change in implied volatility                                             |
| **Theta**                    | How much the option price decays per day as time passes -- the cost of holding an option                            |
| **Risk Reversal (RR)**       | The difference in IV between an OTM call and an OTM put at the same delta -- measures directional skew              |
| **Butterfly (BF)**           | The average of OTM put and call vols minus ATM vol -- measures smile curvature / tail risk pricing                  |
| **SABR Model**               | A stochastic volatility model commonly used to fit and interpolate FX vol surfaces                                  |

## How It Works

<Steps>
  <Step title="Vol Surface Snapshot">Call `equity_vol_surface` or `fx_vol_surface` based on asset type. Extract ATM vol term structure, risk reversals, and butterflies.</Step>
  <Step title="Template Discovery">Call `option_template_list` to find available option types, expiries, and strikes.</Step>
  <Step title="Option Pricing">Call `option_value` for specific options. Extract premium, delta, gamma, vega, theta, implied vol.</Step>
  <Step title="Historical Data">Call `tscc_historical_pricing_summaries` or `qa_historical_equity_price` for 1Y daily history.</Step>
  <Step title="Realized Vol Computation">From historical prices, compute close-to-close realized vol over 20-day, 60-day, and 90-day windows. Compare to matching implied vol tenors.</Step>
  <Step title="Synthesize">Combine surface shape, Greeks, and IV-vs-RV comparison into a vol assessment with strategy recommendations.</Step>
</Steps>

## How to Add to Your Local Context

```bash theme={null}
claude plugin install lseg@financial-services-plugins
```

Customize by adding your firm's vol models, preferred strategies by vol regime, or specific underlying assets to monitor.

## Best Practices

* Always start from the vol surface for the big picture, then drill down to specific options
* The vol premium (IV minus RV) is the key metric -- but consider which RV window is most relevant
* Skew direction matters: in equities, negative skew (puts more expensive than calls) is normal; a flattening of skew can signal changing risk perception
* Term structure shape (backwardation vs. contango) indicates near-term vs. long-term uncertainty
* Be explicit about the vol regime (low/normal/elevated/crisis) when making recommendations