Time‐Weighted Volatility

Abstract

We discuss the question of weekend and holiday market volatility in the options markets, its implications for the temporal interpolation of implied volatility, and the ramifications for numerical theta computations for the purpose of commercial profit and loss (P&L) explanations. We give a practical methodology to accommodate these observations and requirements in a derivatives trading environment, and compare what this method implies for the future evolution of so-called “overnight” options in the foreign exchange market with actual market-observed time series of such traded instruments' Black implied volatilities.