Options Clearing Corporation Proposes Rule Change To Enhance 'Vanilla Option Model' And 'Smoothing Algorithm'

Author:Mr Cadwalader, Wickersham & Taft LLP
Profession:Cadwalader, Wickersham & Taft LLP
 
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The Options Clearing Corporation ("OCC") proposed a rule change to enhance the "Vanilla Option Model" and "Smoothing Algorithm."

The proposal would improve the Vanilla Option Model's theoretical pricing and preserve consistency between implied call volatility and implied put volatility in options at the same strike price and maturity. Under the proposal, the Model would incorporate "interest rate yield curves, forecasted dividends and borrowing costs into the theoretical pricing of plain vanilla listed options."

The proposal would also improve the implied volatility smoothing of the Smoothing Algorithm by eliminating certain timing inconsistencies and gradually capping high volatilities to...

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