The Options Clearing Corporation ("OCC") proposed a rule change to enhance the "Vanilla Option Model" and "Smoothing Algorithm."
The proposal would improve the Vanilla Option Model's theoretical pricing and preserve consistency between implied call volatility and implied put volatility in options at the same strike price and maturity. Under the proposal, the Model would incorporate "interest rate yield curves, forecasted dividends and borrowing costs into the theoretical pricing of plain vanilla listed options."
The proposal would also improve the implied volatility smoothing of the Smoothing Algorithm by eliminating certain timing inconsistencies and gradually capping high volatilities to reduce arbitrage opportunities.
If approved, the OCC rule change would be implemented on September 15, 2019. Furthermore, the OCC stated that this will affect the OCC clearing margin and Risk-Based Haircut / Customer Portfolio Margin theoreticals for the settlement date of September 17, 2019.
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