Early Expiry Volatility

[kbhatt]

Hi,

I am new to Quant but have worked as software developer in risk management product.

I need to understand what are the different ways to calculate early expiry volatility. Basically I need it to price serial(strip) option. One of the suggestion was given to use Gabillon Model to calculate EEV.

My questions are
1. What are different ways to calculate EEV?
2. What is Gabillon model and how to use it to calculate EEV?
3. What advantage Gabillon model has over other models to calculate EEV?

I guess Gabillon model is used to construct volatility term structure. Is it correct? I appreciate if someone can explain Gabillon model and/or provide some reference material on how to use it to calculate EEV.

Thanks in advance for all the help.

 

[KaiRu]

You may want to look at Jim Gatheral "Volatility Surface" book. It has nice article on volatility surface asymptotics in general and short expirations in particular.

 

[kbhatt]

Thanks for pointing this out. I quickly glanced through chapter 7 of this book "Volatility Surface Asymptotics".

It doesn't talk about Gabillon model which I really want to understand.

Could someone suggest the models generally used for pricing Strip Option.

Any explanation and/or reference to Gabillon model would be highly appreciated.

Why this model is preferred over others for calculating EEV?