{"title":"Volatility trading with the quadratic normal model in the oil options market","authors":"Ilia Bouchouev , Brett Johnson , Wu-Yen Sun","doi":"10.1016/j.jcomm.2026.100545","DOIUrl":null,"url":null,"abstract":"<div><div>The paper applies the recently developed quadratic normal model (QNM) to oil options. This three-parameter model assumes parabolic local volatility and extends the Bachelier model to a much broader class of “fat-tailed” distributions with two additional parameters related to skewness and kurtosis. The primary focus of this paper is to demonstrate how this model can be efficiently calibrated to option prices and used by volatility arbitrageurs in managing their portfolios. We calibrate model parameters daily to market prices of WTI options over an extensive twenty-five year period and analyze the dynamics and stability of parameters over time. We show two primary applications of the model for delta-hedging of market-making portfolios and for pricing over-the-counter options.</div></div>","PeriodicalId":45111,"journal":{"name":"Journal of Commodity Markets","volume":"41 ","pages":"Article 100545"},"PeriodicalIF":5.2000,"publicationDate":"2026-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Commodity Markets","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S2405851326000073","RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"2026/2/10 0:00:00","PubModel":"Epub","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
The paper applies the recently developed quadratic normal model (QNM) to oil options. This three-parameter model assumes parabolic local volatility and extends the Bachelier model to a much broader class of “fat-tailed” distributions with two additional parameters related to skewness and kurtosis. The primary focus of this paper is to demonstrate how this model can be efficiently calibrated to option prices and used by volatility arbitrageurs in managing their portfolios. We calibrate model parameters daily to market prices of WTI options over an extensive twenty-five year period and analyze the dynamics and stability of parameters over time. We show two primary applications of the model for delta-hedging of market-making portfolios and for pricing over-the-counter options.
期刊介绍:
The purpose of the journal is also to stimulate international dialog among academics, industry participants, traders, investors, and policymakers with mutual interests in commodity markets. The mandate for the journal is to present ongoing work within commodity economics and finance. Topics can be related to financialization of commodity markets; pricing, hedging, and risk analysis of commodity derivatives; risk premia in commodity markets; real option analysis for commodity project investment and production; portfolio allocation including commodities; forecasting in commodity markets; corporate finance for commodity-exposed corporations; econometric/statistical analysis of commodity markets; organization of commodity markets; regulation of commodity markets; local and global commodity trading; and commodity supply chains. Commodity markets in this context are energy markets (including renewables), metal markets, mineral markets, agricultural markets, livestock and fish markets, markets for weather derivatives, emission markets, shipping markets, water, and related markets. This interdisciplinary and trans-disciplinary journal will cover all commodity markets and is thus relevant for a broad audience. Commodity markets are not only of academic interest but also highly relevant for many practitioners, including asset managers, industrial managers, investment bankers, risk managers, and also policymakers in governments, central banks, and supranational institutions.