Introduction: What is OIPD?
OIPD (Options Implied Probability Distribution) provides two related capabilities:
1. Compute market-implied probability distributions of future asset prices.
- While markets don’t predict the future with certainty, under the efficient market view, these market expectations represent the best available estimate of what might happen.
- The probability distribution is a transformation of the volatility surface. Thus, accurately modelling a volatility surface is crucial to computing the distribution, which leads to OIPD’s second feature below.
2. Fit arbitrage-free volatility smiles and surfaces for pricing and risk analysis.
- Fitting a vol surface well is a complex and expensive process, with the leading software provider costing $50k USD/month/seat. OIPD open-sources the entire pipeline fairly rigorously, with further improvements in the roadmap.
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