The vanna-volga method for implied volatilities

Option pricing

The vanna-volga (VV) method is an empirical procedure that can be used to infer an implied-volatility smile from three available quotes for a given maturity.1 It is based on the construction of locally replicating portfolios whose associated hedging costs are added to corresponding Black-Scholes prices to produce smile-consistent values. Besides being intuitive and easy to implement, this procedure has a clear financial interpretation, which further supports its use in practice.

The VV method is

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