Recalculation Triggers
Recalculation of the bid, strike(mid), and implied volatilities and Greeks for a given option contract are triggered in 3 different ways. Once triggered, the IV's and Greeks are recalculated in real-time.
1. automatic daily recalculation at open
2. anytime contract bid or ask price changes at all
3. if underlyer price changes by a certain number of basis points - currently set to 10 basis points = 0.01%, with a minimum price threshold of $10.00 = $0.001 change.
Implied Volatilty Calculation
The bid, strike(mid), and ask IV's are calculated using an iterative bisection method and Black-Scholes pricing model (see separate article).
The Black-Scholes formula is seeded with time to maturity, underlyer price, strike price, risk free return (3 mo treasury), underlyer dividend yield, call/put, and the last bid/strike/ask IV. On each iteration, the estimated price is calculated using the Black-Scholes formula with revised IV until the price converges to within 0.01% of the actual current bid/strike/ask price.
Note that the strike(mid) IV price = mid-price of bid/ask if extrinsic value > 0, otherwise uses ask price (and will be the same as Ask IV in this case).
Greeks Calculation
Once the implied volatilities are calculated, the following greeks are determined using the derived strike(mid) IV and the same Black-Scholes model seeded as per above. See separate article for the formulas for each greeks.
Delta
Gamma
Theta
Vega
Rho