The Arrow Markets pricing engine fits SVI curves for implied volatility
For our benchmark prices, we use SVI models (so-called stochastic volatility-inspired models), which provide tractable volatility curve parameterizations. Options market makers and traders commonly use these models. Here are some key references on the SVI approach: URL.
The SVI model specifies the implied volatility curve as essentially a second-order expansion around log moneyness
where we enforce the relation
are obtained by fitting this model to market-implied volatility quotes. In practice, this curve is refit at some frequency, and data cleaning needs to occur. Arrow's up-to-date fit frequency and data cleaning steps are maintained here: URL.
A separate set of parameters is fitted for each expiration. To get the midpoint price for an option with strike
, we calculate the log moneyness
and consult the fitted curve associated with expiration
to get the implied volatility
The midpoint price is then the BSM price of the option given