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Model of Volatility Skew
WTM Energy Software, LLC, has
developed a proprietary volatility skew model for energy commodities. Skews from this model match characteristics
observed for commodity option skews quite well. Our modeled skew . . .
- increases in the strike price
- is mostly flat for very high and very low strikes and
- is implied from current option prices
This model does not utilize an ARCH/GARCH approach; that approach can be
tedious and time-consuming. The model is built for speed. And since the model is both fast and
implies the skew from option prices, it is accurate and can be incorporated into a variety of complicated
derivative models, including storage models. WTM is working to incorporate its volatility skew model
into its innovative natural gas storage model at this time.
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