The vanna-volga method for implied volatilities
The vanna-volga method is a popular approach for constructing implied volatility curves in the options market. In this article, Antonio Castagna and Fabio Mercurio give it both theoretical and practical support by showing its tractability and robustness
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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