TOS IV model settings

[gneyman]

https://tickertape.tdameritrade.com/trading/whats-hot-and-whats-cool-17322

It’s All in the Vol: Choose Your Default Volatility​

There’s no such thing as certainty in the options world. Implied volatilities (IVs) are independent from one options cycle to another. Changing IVs, different price models (e.g., Black-Scholes), and time decay can change the P&L of your trades. So it’s a good idea to spend time analyzing potential trades and figuring out how different volatility calculations affect them.
On the thinkorswim platform from TD Ameritrade you have a few choices for volatility calculation modes. The platform defaults to “individual implied volatility,” but there are two other modes: “volatility smile approximation” and “fixed volatility per expiration date.”
From the Setup menu in the top right of thinkorswim (gear icon), select “Application Settings …” and you’ll see a screen that looks like the one in Figure 2.


FIGURE 2: WHICH VOL CALCULATION MODE SHOULD YOU USE? On your thinkorswim platform, from Application Settings, you can opt to use one of three vol calculation modes. Source: thinkorswim from TD Ameritrade. For illustrative purposes only.

1. Select the General tab
2. Choose Calculations from the menu
3. From there, you can select the Volatility calculation mode you wish to apply to your trading strategy analysis, particularly to see how the greeks (delta, gamma, theta, vega) change

Individual implied volatility uses a distinct implied volatility for each strike.
Volatility smile approximation accounts for skew in the out-of-the-money strikes, which tend to have inflated IVs.
Fixed volatility per expiration date shows theoretical prices if all options of a series were at the same vol level as the at-the-money options.
In the end, 99% of what you need is in the default volatility settings. But if you like to geek out with this stuff, and you feel your volatility settings are leading you astray, it might be worth playing around with this feature. One model isn’t necessarily more accurate than another. These are theoretical settings that can be helpful when analyzing potential positions.

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As you can see, each model generates different greeks & curves





CLEARLY, THIS BEGS THE QUESTION: HOW IS ONE TO DELTA HEDGE OR ANY OTHER GREEK IF THE OPTICS ARE LITERALLY MODEL-DEPENDENT, YET P&L RULES SUPREME?

 

[status1]

I would say it's not much of a choice since only the IIV gives you the real p/l I am not sure what the result would be if you adjust the trade based on the delta of the other settings
On occasion I would use the Fixed or the smile when the T+0 line is way off because the IIV of one of the strikes is missing or way off but that is mostly after trading hours but I would not make any adjustments based on any of the greeks in those 2 models

 

[Marcas]

CLEARLY, THIS BEGS THE QUESTION: HOW IS ONE TO DELTA HEDGE OR ANY OTHER GREEK IF THE OPTICS ARE LITERALLY MODEL-DEPENDENT, YET P&L RULES SUPREME?

Hi,
delta hedging has many flavors. Doing contentious delta hedging can became quite expensive for retail traders. You can adjust you position once a week or/and with each 1% move - as an example. In this case you don't need exact delta numbers - mostly anything will do.
If you intend to adjust few times per day then you want as good delta as possible and getting those is not a trivial task.

If you want to experiment with TOS models, the best way I can thin off, is to put some position on, do delta hedging for some time with different models that TOS provides and compare results. Best would be to to automated tests but, if not mistaken, TOS's models are propriety. Also each model can perform differently depending on vol environment or used underlying.

Same goes for other greeks. It's good to investigate that stuff, understand pros and cons, be aware of pitfalls. Never take any greeks with a blind trust.