Speaker: Professor Nicola Fusari (Carey Business School, Johns Hopkins University)
Hosted by: University of Liverpool Management School's Accounting and Finance Group
Open to: all University of Liverpool staff and students, with no sign up needed
Date: Wednesday 1 November 2023
Time: 3-4.30pm
Place: Management School - Seminar Room 6
Abstract
The market for ultra short-term (zero days-to-expiry or 0DTE) options has grown exponentially over the last few years.
In 2023, daily volume in 0DTEs reached over 45% of overall daily option volume.
After briefly describing this exploding new market, we present a novel pricing formula designed to capture the shape of the 0DTE implied volatility surface both out-of-the-money (through discontinuities in the dynamics of the underlying) and at-the-money (through continuous volatility dynamics driven, in particular, by leverage and the volatility-of-volatility).
The latter result hinges on an Edgeworth-like expansion of the conditional characteristic function of the continuous portion of the underlying's price process.
The expansion shifts probability mass from an otherwise locally Gaussian return density by adding time-varying skewness (through leverage) and time-varying kurtosis (through the volatility-of-volatility).
The expansion is local in time and, therefore, naturally suited to price ultra short-tenor instruments, like 0DTEs. We document considerable price improvements as compared to state-of-the-art specifications.
We also provide suggestive results on nearly instantaneous predictability (through leverage and the volatility-of-volatility) by estimating 0DTE return/variance risk premia.
Co-authored by Professor Nicola Fusari, Federico M. Bandi and Roberto Renò.
Keywords
Ultra short-tenor options, zero days-to-expiry options (0DTEs), pricing, instantaneous return/variance risk premia
Full paper
Bandi, F.M., Fusari, N. and Renò, R. (2023). '0DTE Option Pricing'.
- DOI: 10.2139/ssrn.4503344
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