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SANOS -- Smooth strictly Arbitrage-free Non-parametric Option Surfaces

Published: January 16, 2026 | arXiv ID: 2601.11209v1

By: Hans Buehler , Blanka Horvath , Anastasis Kratsios and more

Potential Business Impact:

Makes stock price predictions more accurate and safe.

Business Areas:
Trading Platform Financial Services, Lending and Investments

We present a simple, numerically efficient but highly flexible non-parametric method to construct representations of option price surfaces which are both smooth and strictly arbitrage-free across time and strike. The method can be viewed as a smooth generalization of the widely-known linear interpolation scheme, and retains the simplicity and transparency of that baseline. Calibration of the model to observed market quotes is formulated as a linear program, allowing bid-ask spreads to be incorporated directly via linear penalties or inequalities, and delivering materially lower computational cost than most of the currently available implied-volatility surface fitting routines. As a further contribution, we derive an equivalent parameterization of the proposed surface in terms of strictly positive "discrete local volatility" variables. This yields, to our knowledge, the first construction of smooth, strictly arbitrage-free option price surfaces while requiring only trivial parameter constraints (positivity). We illustrate the approach using S&P 500 index options

Page Count
23 pages

Category
Quantitative Finance:
Computational Finance