A contract that gives the owner the right, but not the obligation, to buy or sell a security at a fixed price in the future.
3
votes
1answer
21 views
Different Exercise Style Options on Same Underlying
Some equities on European markets have options traded in two different exercise styles: American and European.
Examples:
ABB and ABB (european) on Eurex
Banco Santander on MEFF
Consider ...
-4
votes
0answers
33 views
Why are call options needed? [duplicate]
My question is actually less ambitious and more specific then the title may have lead you to believe.
Suppose the interest rate is $25\%$ you have a stock at time zero price of $S_0=50$ and at time 1 ...
4
votes
5answers
552 views
Call vs. Put Option
I have two interrelated questions that have been bothering me for some time. I have read all the stuff online and it still doesn't make sense to me:
Let us assume:
0% interest rate (both hedge ...
3
votes
2answers
766 views
Pair Trading Index Options
Suppose the trade is between Index Options of two Indices X and Y which are quite similar (but not exactly).
So for the equivalent strikes, one can quote option on Index X and cover in Index Y.
But ...
1
vote
2answers
216 views
backtesting options strategies in R
I would like to backtest an options strategy in R. I require the ability to delta hedge and rebalance to options in the portfolio at different frequencies (daily, monthly,etc.) What packages are the ...
8
votes
2answers
595 views
How does volatility affect the price of binary options?
In theory, how should volatility affect the price of a binary option? A typical out the money option has more extrinsic value and therefore volatility plays a much more noticeable factor. Now let's ...
6
votes
4answers
388 views
Best way to store hourly/daily options data for research purposes
There are quite a few discussions here about storage, but I can't find quite what I'm looking for.
I'm in need to design a database to store (mostly) option data (strikes, premiums bid / ask, etc.). ...
2
votes
2answers
115 views
Hedging credit risk using Put equity options
I am looking for some paper or similar which deal with this topic: hedging bankruptcy on firm's debt using Put options written on that firm's equity price.
This should be based on the assumption that ...
1
vote
0answers
87 views
Interpolate option volatility in delta space in R
I have a bunch of deltas and option implied vols at those deltas. I would like to interpolate them in R. Interpolating them in delta space seems difficult, since normally you would like the ATM calls ...
4
votes
5answers
425 views
In Black-Scholes, why is $\log{\frac{S_{t+\triangle t}}{S_t}} \sim \phi{((\mu - \frac{1}{2}\sigma^2)\triangle t, \sigma^2 \triangle t)}$?
Namely, I dont understand why the mean is $(\mu - \frac{1}{2}\sigma^2)\triangle t$ and not just $\mu \triangle t$. I am aware that it is supposed to represent a lognormal distribution, but I guess I'm ...
10
votes
3answers
1k views
Is there an all Java options-pricing library (preferably open source) besides jquantlib?
I am looking for an all-java implementation of black scholes, preferably open source. I found jquantlib and quantlib (C++). Any other recommendations?
The jquantlib site seems to be down.
I'd prefer ...
2
votes
1answer
79 views
Implied dividend estimation
I am looking at two different ways of estimating the expected / implied dividends from market data.
1. Dividend futures
I know that this asset class is not very liquid and might not be ...
2
votes
2answers
101 views
How to synchronize put and call option-data?
I recently retrieved a large amount of European option data, for call and put prices, from OptionMetrics. Doing so for the same time period I get a file consisting of
62558 rows of call prices & ...
2
votes
1answer
84 views
Hedging differences between equity and index options?
Suppose we hedge an index option using futures on that index. How would the hedging strategy be different if the underlying could be traded directly (from a risk point of view)?
2
votes
2answers
311 views
How to calculate Vomma of Black Scholes model
This source (PDF) gives the closed-form for vomma (or volga, i.e. the second derivative of price w.r.t. volatility) of the Black Scholes option pricing model as:
...
0
votes
0answers
135 views
Option vs Equity market-making strategies? [closed]
I need to implement a few "strategies" for a university project I am doing. The emphasis of the project is not on the strategies, but the technical (programming) means by which they are implemented.
...
11
votes
2answers
409 views
Can you replicate an option on an arbitrary basket of stocks?
Since a market index is nothing more than a basket of stocks, you can create your own index by putting together stocks of your choice. The only difference is that you can trade options on major ...
4
votes
1answer
236 views
Call option arbitrage opportunity
I am having trouble wrapping my head around some text provided to us by our lecturer (unfortunately he is currently unavailable). If we let $c$ be the price of a European call option, $S_0$ the ...
5
votes
3answers
203 views
Implied Volatility Calculation
We all know if you back out of the BS option pricing model you can derive and solve what the options is "implying" as its volatility. However, what is the formula used to derive IV (can anyone direct ...
2
votes
1answer
100 views
OTC Equity Options' Dynamics
This only applies to options that do not have marketable equivalents since margin can be marked to them.
I've never been able to find this on my goog.
How is margin typically calculated for OTC ...
0
votes
2answers
93 views
monthly contract volume required for penny increments?
Have the exchanges disclosed their criteria?
Does anyone have a best guess based upon observations of volume (however you wish to define it)?
Please no qualitative answers.
0
votes
2answers
87 views
changes in open interest vs changes in underlying volume
Has a relationship been noted?
Mostly, I'd like to know if the open interest increases on an underlying, does the underlying usually see increased trading?
My guess would be "yes" since MMs can ...
0
votes
0answers
38 views
Need historical option data for my final graduation project [duplicate]
I am a student doing my final graduation project on uncertainty quantification applied to option pricing.To validate my work I need historical european option data.So I wonder if there is someone here ...
5
votes
3answers
737 views
What really drives option implied volatility?
A common and oft repeated belief regarding options volatility is that implied volatility increases due to people bidding up a contract, usually related to anticipation of the outcome of an expected ...
3
votes
3answers
205 views
Does implied vol vary for calls vs puts?
Volatility skew tells us that options with the same maturity at different strikes can have different implied vol. However, can a corresponding call and put for the same strike and maturity have ...
2
votes
1answer
152 views
Calculating the probability of a price change using an options pricing formula
I don't know if I'm doing this right and I'd greatly appreciate help.
I'm trying to use an option pricing formula to backout the likelihood of the Euro dropping below $1.27, even for a minute, at any ...
4
votes
1answer
146 views
Hedging with actual volatility: problem understanding the math behind the result
From this paper. page 3
We get that the total profit at expiration is the difference in value between the price of the option with actual volatility and the one with implied volatility.
I have tried ...
3
votes
2answers
100 views
Endogeniety of Black-Scholes
I know this is a naïve question but how does the BS formula have a closed form solution? It seems from what I am reading Price impacts delta, price influences volatility which in turn influeces delta ...
2
votes
2answers
260 views
Theta's effect for OTM options
How does $\Theta$ change for deep out-of-the money options? Looking at the below graph, it seems the time decay is highest for ATM options and increases rapidly as we approach maturity of the option. ...
5
votes
0answers
201 views
option chain data visualization, sunburst
I think option chains are not represented in the best way. With more and more options products coming out and trading on the various exchanges, I see vendors struggling to keep up with a good way to ...
3
votes
1answer
148 views
Choice of epsilon for numerical calculation of vega in binomial option pricing model
I have a binomial option-pricing model (I don't think the details of how its implemented are relevant). However, when I go to calculate vega, I am essentially running the model a second time with new ...
8
votes
3answers
428 views
Implementing a Fast Fourier Transform for Option Pricing
So, I'm in need of some tips regarding a small project I'm doing. My goal is an implementation of a Fast Fourier Transform algorithm (FFT) which can be applied to the pricing of options.
First ...
13
votes
6answers
3k views
What is the “delta” option quoting convention about?
At my work I often see option prices or vols quoted against deltas rather than against strikes. For example for March 2013 Zinc options I might see 5 quotes available for deltas as follows:
...
2
votes
2answers
180 views
Why FX Vanilla Options are quoted in volatility
I've been curious why vanilla options are quoted (and traded) in terms of volatility. Considering that every financial institution has its own options pricing model, volatility as an input would cause ...
2
votes
1answer
184 views
Can a long put trade be profitable through Vega even if the underlying moves upwards?
Generally speaking, I know when implied vol increases, option prices increase for calls.
However, does the same occur for puts?
If I am expecting implied volatility to increase for an option on an ...
3
votes
1answer
105 views
how to define liquidity in equity, index, and etf options
i've heard several ways to put a metric on liquidity of options.. obviously liquidity isn't a constant.. things like the Bid/Asks spread, liquidity of the underlying.. Trying to find a way to ...
4
votes
2answers
270 views
Why doesn't a simulated delta hedging process go to zero?
I put together a simple simulation of delta hedging a set of options with an underlying and it seems that the fluctuations of the price still seem to affect the final outcome. The reason, I understand ...
3
votes
4answers
712 views
How to calculate stock move probability based on option implied volatility and time to expiration? (Monte Carlo simulation)
I am looking for one line formula ideally in Excel to calculate stock move probability based on option implied volatility and time to expiration?
I have already found a few complex samples which took ...
2
votes
1answer
130 views
How to calculate implied volatility and greeks in Bull Put Spread option strategy?
Ok, obviously I am buying lower strike put and selling higher strike put. What is the recommended volatility and greeks to consider in my trade?
Volatility:
Average volatility between both legs?
...
4
votes
4answers
673 views
How to price a calendar spread option?
How do you price calendar spread options, that is, options on the same underlying and the same strike but different times to maturity?
Clarification: I'm interested in the pricing of a a CSO ...
3
votes
2answers
104 views
How to quickly sketch a second order greek profile for a vanilla position?
Assume that you are given an arbitrary payoff profile for European vanilla position (e.g. butterfly). How to make a back of the envelope sketch of a second order greek profile for it (i.e. plot ...
0
votes
1answer
231 views
Which prediction market model is efficient and simple to use?
For a college project I'm tasked with implementing prediction market. Which model of it I'd better choose?
I want something useful and simple enough for other people to quickly understand and use. ...
1
vote
2answers
126 views
Delta of a Down and Out Call
I came across some graphs depicting the delta of a down-and-out call. They show that, if the risk free rate of return is 0, the delta is constant at 1. However, if the rate of return is for example ...
7
votes
4answers
960 views
Methods for pricing options
I'm looking at doing some research drawing comparisons between various methods of approaching option pricing. I'm aware of the Monte Carlo simulation for option pricing, Black-Scholes, and that ...
2
votes
4answers
298 views
Why is short term implied volatility typically higher?
Why do short term implieds move more than long term?
7
votes
2answers
716 views
What does the VIX formula measure and how does it work?
I have read the CBOE's white paper on the VIX and a lot of other things, but I need to honestly say, I don't really get it, or I am missing something important.
In semi-layman's terms, is the VIX ...
3
votes
1answer
81 views
Value options when the currency’s risk free rate is negative?
How would you handle a negative interest rate in index/equity options valuation?
An example would be negative rates for short term maturities for Swiss Frank (CHF).
4
votes
2answers
335 views
Basket option pricing: step by step tutorial for beginners
I would like to learn how to price options written on basket of several underlyings.
I've never tried to do it and I would appreciate if you can provide some documents, papers, web sites and so on in ...
23
votes
8answers
1k views
Option pricing before Black-Scholes
According to the Wikipedia article,
Contracts similar to options are believed to have been used since ancient times.
In London, puts and "refusals" (calls) first became well-known trading ...
5
votes
0answers
100 views
Replicating portfolio and risk-neutral pricing for interest rate options
For equity options, the pricing of options depends on the existence of a replicating portfolio, so you can price the option as the constituents of that replicating portfolio. However, I am not seeing ...
