Fair Vol
The variance-swap-implied risk-neutral ATM volatility.
Definition
Risk-neutral ATM volatility derived by integrating the full vol smile using the variance-swap replication formula, then converting back from variance to vol.
Formula
fair_vol = sqrt( fair_variance ÷ T ) × 100
fair_variance is the variance-swap fair strike, computed from the full smile. T is time-to-expiry in years.
Inputs
Full vol smile (SVI fit)Expiry TStrike grid
Output
fair_vol (%, annualized)
Interpretation
- fair_vol > atm_iv: wings are rich vs ATM; positive convexity premium.
- fair_vol < atm_iv: wings cheap vs ATM; rare and often signals data issue.
- fair_vol ≈ atm_iv: smile is fairly priced; convexity premium near zero.
API Reference
Endpoint
GET /v1/volatility/{symbol}
Tier
Alpha
Response field
fair_vol
Why Fair Vol Matters for Trading
TL;DR
Fair vol is the model-free 'should-be' ATM vol derived from the full smile via variance-swap replication. Comparing it to raw ATM IV is how you isolate convexity premium.
- What it measures
- The variance-swap fair strike re-expressed as an annualised volatility. Uses the entire smile, not just ATM.
- What it signals
- What ATM IV would be if priced consistently with wing vols under the variance-swap replication.
- Why we measure it
- Raw ATM IV is one strike. Fair vol aggregates the whole smile. The gap between the two is a clean measure of wing richness.
- Who uses it
- Quant vol desks, dispersion traders, variance-swap market makers. Alpha tier.
How to read Fair Vol
fair_vol >> atm_iv
- Wings carry high premium
- Variance-swap sellers collect
- Short-wing strategies fit
- Typical after skew steepening
Good for: variance-swap sellers, short-wing traders
fair_vol < atm_iv
- Wings abnormally cheap
- Often signals surface distortion
- Check arb flags
- Rare healthy-market reading
Bad for: naive fair-vol trades
fair_vol ≈ atm_iv
- Smile priced consistently with ATM
- No wing-specific edge
- Trade ATM straddles
- Standard liquid-chain reading
Fair
Rules of thumb
- Fair vol > ATM is the norm for equity indexes. Equity skew guarantees wings are richer than ATM; the magnitude of the gap matters more than the sign.
- Use for variance-swap pricing. Fair vol is literally the variance-swap fair strike. Any variance trade starts here.
- Compare across expiries. Fair-vol term structure reveals the vol-of-vol regime better than ATM term structure alone.
- Requires clean SVI fit. Poor fits produce unreliable fair vol. Always check dispersion and arb flags.
- Alpha tier only. Requires full-chain SVI fit — not exposed on free/basic tiers.
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