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?

2 Answers 2


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.


Overnight refers to a time to maturity. In simple models that do not use fractions of days, a full day expiry is 1/365 years. In reality, FX options have a very liquid OTC market that not only trades for overnight maturity, but is also directly quoted in implied vol. These 1D (ON) quotes have a cut-off, meaning that the option expires at a certain time on the day of expiry. Most frequently that is New York 10am but it ultimately depends on the pair, and also on the term sheet. In Asia, the Tokyo 3pm (UTC+9) cut-off is used frequently. Below is a screenshot of Bloomberg's OVDV vol surface where you can see the ON (1D) quotes as well as the Cut-off of the contributions.

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On a side remark, technically every strike will have a different IV. Given I can no longer read the article, I assume they refer to at-the-money (ATM) IV, because that is the most generic quote from all strikes. It is usually ATMS (relative to spot) for expiries <1y, and ATMF (relative to the forward) for expiries >1y.

If you were to switch to a different cut-off (say NY 5pm) you will get interpolated (hence white) values to account for the difference in time to expiry and the fact that there are no readily available quotes for this particular cut-off.

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