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I am interested in building an implied volatility surface for a given ETF given a set of option prices for several combinations of (call/put,strike,expiry). I am interested in different ways to arrive at the ETF forward price (assume value date = expiry+2)

The forward price is a function of spot, discount rate, and implied dividend yield. I can easily access spot, and have my own USD discount curve based on SOFR. I am struggling with the dividend yield component.

Current Approach: I back out the synthetic forward rate using the prices of the call and put struck at the closest strike to current spot. From that rate I adjust for spot and my own discount rate for that value date, and that leaves me with the implied dividend yield.

Drawbacks of current approach: The more illiquid the ETF, and/or the longer dated the expiry, the wider the streaming bid/offer for the options. This leads to much more noise in calculating the synthetic forward rate as I am assuming there is no skew in the bid/offer when taking the averages. Secondly, this approach also seems a bit hacky as I am not explicitly sourcing a dividend yield from some other asset, rather I am using my estimate of risk-free rate (which could be well off from market implied rate) and also assuming no other drivers of the synthetic forward price.

Available Data Sources: I am using IBKR to stream the prices, and have access to BBG. BBG provided an "Indicative Yield" data field as well as a BDVD forecast, but I am not sure if this is market implied. It also does not support some relatively liquid and popular ETFs.

Summary: How are you arriving at the forward price of an ETF for pricing purposes? How are you splitting the option implied synthetic forward into its subcomponents?

Edit:

As suggested by AKDemy in the comments, his answer to another question is helpful:

Is it possible to have only one volatility surface for american options (that fits both calls and puts)?

quantypythonshow
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  • What ETF? Are these listed options? What happens if you load the ETF and type OVDV? – AKdemy Mar 19 '24 at 20:11
  • It’s mostly QQQ, IWM, and SPY exchange traded options. Yes I am aware of OVDV and also OMON for specific strike implied vol - I am more interested in trying to back out the vol myself via the prices. My background is more in FX vols where vanillas are quoted in vol terms to begin and currency swaps are observable - so the premium is just an afterthought. In this case it’s the premium that’s being quoted and without a dividend yield it’s not obvious how to back out the vols. – quantypythonshow Mar 20 '24 at 11:47
  • The process is often done following these steps. Doing something like this should get you close to what Bloomberg does on OVDV. If you load a listed option on OVME, you can see what dividends are a implied in the market data section (it's a choice in a drop-down). – AKdemy Mar 20 '24 at 16:05
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    Thank you - your link is most helpful and answers my question – quantypythonshow Mar 21 '24 at 02:38

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