In the FX market, USD/JPY is the pair to watch through Asia today, with the options market showing implied overnight volatility at 35.00. There have been bouts in April, June and August where implied USD/JPY has been this high, which have come prior to other BoJ meetings. The market is expecting a large move today.

What is "overnight volatility"? I thought volatility only depends on time to maturity of option?


Implied volatility is the "average" (in a certain sense that is hard to explain here) volatility of the underlying expected by the market before maturity of an option.

Most options mature in a long time (a few days), and thus counting in terms of days usually makes sense.

If I buy an option when the market close whose maturity is the open price of tomorrow, I need to have another approach : split the total variance in the price of the underlying in variance realized during the day + variance realized overnight.

So for options with short maturities, you want to use some concept of "overnight volatility".

To take an analogy, if you know that 1000 people come to your website every 24 hours, this number will be enough for you to make your estimates for the month, or for the week. But to know how many people will come to your website this night between 0:00 and 6:00, you need to resort to an intraday model.

The quote you mention refers to this slightly modified model that describes overnight changes in the quote.

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