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.

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5
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2answers
106 views

Creating Options Database

I am trying to create a database which will hold information for various stock options and will need to be updated daily. The idea is to use this database to keep track of changes in the open interest ...
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1answer
103 views

Complicated American style option contract with numerous non-standard features (simultanous exercise, additional premium, etc.)

I want to value the following contract for times $0<t<T$, i.e. determine $V(t,\cdot)$ where $\cdot$ refers to all other dependences (strike, spot, volatility, etc.). The contract is long and ...
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1answer
97 views

Relations between Call and Put

I am trying to solve a question in finance but I am pretty much stuck and would need your help :) Suppose you know the following information about a market: Future is at 66 70 strike straddle is ...
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3answers
61 views

Constant Maturity IV

I want to analyze IV skew under various market conditions but its hard given various expirations. Would it make sense to create a constant maturity IV that say is 60 DTE? Has anyone done this and what ...
2
votes
1answer
52 views

Option pricing: Risk neutral probability calculation

Let $u=1.3$ $d=0.9$ $r=.05$ $S(0)=50, X = \text{strike} = 60$. Assume binomial model Why isn't the risk neutral probability found by solving the following for $p$: ...
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1answer
83 views

Monte Carlo Option Pricing: Averaging Price Per Path

In Glasserman's book, he computes the price of an option by first computing the average price over each simulated price path. Once all the paths have been simulated, the average of all the payoffs is ...
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0answers
13 views

Proving the convexity of put price [duplicate]

Prove that the price of the European put option is a convex function of the strike price in one-step binomial model. In other words, if $P_E(X)$ is the price of the European put option in one-step ...
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0answers
39 views

Portfolio replication option pricing: Money market position

Why when replicating a call option, the money market position (bond, risk free investment) is negative and when replicating a call option, the money market position is positive? Please explain ...
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1answer
51 views

Put-on-call option confusion

So the question asks: Given a 3-steps Binomial Tree model with $S(0) = 50$, $U = 20%,D = 􀀀20%$, and $R = 5%$. A European call option has the strike price $X = 40$ and maturity time $T = 3$. Also, a ...
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1answer
41 views

Replication strategy of European call option

So the question asks: L et $S(0) = 120$ dollars, $u = 0.2$, $d = −0.1$ and $r = 0.1$. Consider a call option with strike price $X = 120$ dollars and exercise time $T = 2$. Find the option price and ...
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1answer
42 views

Put call parity: when are the premiums the same?

Please explain why put call parity could be compared to the payoff of a long forward contract. ie. $C_E-P_E=V_X(0)$ where $C_E,P_E$ are the call/put premiums and $V_X(0)$ is the value of a long ...
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1answer
60 views

Taleb Modified Delta

How does one go about calculating the modified delta as proposed by Taleb in his book Dynamic hedging? In his book he says its a change in the call price divided by a change in the underlying and ...
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3answers
91 views

Construct option and stock portfolio

If a riskless security costs 100 today and will cost 120 at time T, a stock costs 50 today and will either be 70 or 30 at time T, and call options on the stock have strike price 50 expiring at time T, ...
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4answers
298 views

Shorting an option every day vs shorting only at maturity

Suppose we have 2 strategies : strategy A : every $N$ days, we short a call option with a time-to-maturity of $N$ days; strategy B : every day, we short $\frac{1}{N}$ of a call option with a ...
4
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1answer
183 views

VXV vs. VIX futures: arbitrage opportunities?

At a first glance, VXV and VIX futures should not be compared at all: VXV is an underlying index, whilst VIX futures are derivatives written on a different underlying index, that is, VIX. As ...
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3answers
75 views

Linear combination of payoffs of bull and bear spreads

Write the following payoffs as linear combination of call options with different strikes and possibly some cash and give the closed form formula for them. Attempted solution: The payoff for the bear ...
3
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1answer
71 views

Using limit orders or stop orders and gamma

From Dynamic Hedging by Taleb: Risk Management Rule: Option trader lore states that when long gamma, use limit orders. When short gamma, use stop orders. I cannot understand why this is and the ...
4
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1answer
114 views

Link between Vega and Gamma

"The vega is the integral of the gamma profits ( ie expected gamma rebalancing P/L) over the duration of the option at one volatility minus the same integral at a different ...
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2answers
40 views

Dealers becoming synthetically short an out-of-the-money option

"When dealing with a large-size position, dealer, upon exercise, synthetically become short an out-of-the-money option." How does this work, I cannot see why this happens synthetically in ...
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0answers
14 views

Calendar spreading and difference in cash and futures

"Often the calendar spreading gives rise to two different levels of gamma: a long gamma in one maturity against a short gamma in another one. This may be stable except that the two maturities might ...
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1answer
36 views

Known future volatility and difficulty in predicting final P/L

I have started Chapter 1 of Dynamic Hedging by Taleb and it starts by saying "Even if traders knew the exact future volatility but hedged themselves (rebalanced the gamma) at discretely spaced ...
0
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1answer
50 views

Why are there two expressions for the Black-Scholes hedging portfolio

I am new to derivatives pricing and am trying to understand why there are two different expressions for the Black-Scholes hedging portfolio. The first approach, used in books like Hull, stipulates ...
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0answers
17 views

Use of cash delta vs forward delta and the mirror image rule

There has been no mention in this text of why this formula uses forward delta not cash delta. Why should have this been obvious to the reader? How can a put be delta neutral at 30%, what does this ...
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2answers
67 views

What does this options' data mean?

I've got myself some data on SPX optons which looks like this: ...
5
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3answers
129 views

Binary Option in B-S model - technical question

I want to price Binary Option in Black-Scholes model. The payoff is of the form $f(S_{T})=I_{\{S_{T}-K>0\}}$. If we assume that $t=0$ this is easy, because then we have ...
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1answer
48 views

Potential Arbitrage profit or proof problem

So the question asks: Consider 4 following European call and put options with the same maturity time: Call option with strike price $100$ sell for $45$ Call option with strike price $110$ sell for ...
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0answers
80 views

Closing prices for options written on S&P 500

I would like to find closing prices for all options written on S&P 500. I tried OptionMetrics from Wharton School but unfortunately you only find bid and ask prices. Is there any other database ...
5
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1answer
59 views

Where to find E-mini S&P options price data or chart?

ES futures price data is easy to find, e.g. on Yahoo finance or with a free NinjaTrader demo account. I'm looking for the same for options on that futures contract. The best I could find is the ...
4
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2answers
185 views

How to derive Black's formula for the valuation of an option on a future?

I've got a question about 1976 Black Model and Bachelier model. I know that a geometric brownian motion in the P measure $dS_{t}=\mu S_{t}dt+\sigma S_{t} dW_{t}^{P}$ for a stock price $S_{t}$ leads ...
5
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2answers
2k 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 ...
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0answers
35 views

Effect of surprise dividends on options

The ETF in question is VDC It pays about $2.5 a year in dividends, but the payout dates are very erratic If I were to go long VDC with options, what would be the best way of doing this to avoid ...
2
votes
1answer
94 views

Why is $N(d_2)$ not needed for hedging?

I'm trying to understand delta hedging. If I sell a plain vanilla call option, in order to delta hedge it, I have to buy delta amount of stocks. What I don't understand is that the BS price of the ...
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1answer
38 views

Effect of different maturity options in delta-gamma-hedging

I read about hedging with options and think i got it. However there is a case am not sure how to handle. Is there any exception in the delta-gamma-hedging-(calculaton-)technique? - say: solve an set ...
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0answers
41 views

Stock price distribution from options marks

I am reading the following link: on "recovering probability distributions from option prices" - how to subtract influence of stochastic volatility? At the end of the derivation it seems ...
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2answers
65 views

Black-Scholes and Markovian contingent claim

Background information: Proposition 4.1 - For a European Markovian contingent claim, the Black-Scholes price satisfies $$\Theta(\tau,S) = -\frac{\sigma^2 S^2}{2}\Gamma(\tau,S) - rS\Delta(\tau,S) + ...
2
votes
2answers
127 views

$E[F_T] = F_0 \ \rightarrow \ \text{or} \ \leftarrow \ p = \frac{1-d}{u-d}$?

From Ch 12 in Hull's OFOD, we compute the risk-neutral probabilities for a futures contract: Later in Ch 17, futures options are valued, and we have the same result: In relation to ...
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3answers
50 views

buy asset after exercising call options

Suppose that I buy a call option at \$10 for a stock $S_0 = \$100$, $K = \$110$, expiry date $T$. In $T$, $S_T = \$140$, so that I exercise the option to buy and then sell the assets (buy at $\$110$ ...
2
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1answer
63 views

Calculating probability of options with normal/lognormal distribution: does time make a difference?

I'm trying to calculate the probability of a calendar spread resulting in a profit at expiration, when estimating it is modeled as a lognormal distribution, by getting: ...
2
votes
3answers
113 views

What is the theoretical expected growth in an option's value over a given period of time?

Say an option with five years left before maturity has a value of $x$ today. Theoretically, under the B/S framework, what is its expected value in five years (upon maturity)? Do we assume it will ...
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0answers
95 views

Computation of option vega under CEV

It is easy to define the option vega $\nu=\frac{\partial C}{\partial \sigma}$ under Black Scholes model since volatility is a single quantity. However, under CEV or local volaility model, it is ...
4
votes
1answer
116 views

How to use the Black-Scholes formula with LIBOR rates?

I want to price an FX option using the Black-Scholes model, but I don't know the risk free rate, nor the volatility. I only know the LIBOR rates, the strike, and that the expiration day is 87 days ...
0
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3answers
99 views

Put-Call Parity Application

In the binomial model, how that the Delta of a call option $\Delta^{call}$ and the Delta of a put option $\Delta^{put}$ with the same maturity and strike satisfy $$\Delta^{call}_t - \Delta^{put}_t = ...
3
votes
1answer
105 views

Find call and put volatilities using ATM, Risk reversal and Butterflies volatilities

I have to plot the implied volatility surface for EUR/USD. So, my goal is to produce something like that, from put delta 10 to call delta 10: Searching for informations, I found that I could find ...
2
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6answers
339 views

What is the Benefit of holding a short option?

i am new to corporate finance and ask myself why a investor is interested in being short on a Option? The only he can win is a premium but he can loose much more. I understand with being a short I can ...
3
votes
2answers
221 views

stock option strategies long vs short

What makes an option strategy long or short? I got the impression that if it is a net debit (you pay to open the strategy) it is classified 'long' (strangle, straddle) Then I learned about the call ...
2
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3answers
155 views

Option greeks vs Position greeks

I know that when it comes to delta, you would calculate your position delta (of a stock position) as follows: option delta * position size * 100 For example if I ...
2
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2answers
247 views

Greeks and Option Premium

If a linear sum of options is constructed such that the premium payout is zero, then does it mean that resultant greeks of the cumulated options positions will be nearly zero. For simplicity, lets ...
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0answers
52 views

Why is the probability of first touch equation so complicated?

http://marcoagd.usuarios.rdc.puc-rio.br/hittingt.html The (cumulative) probability distribution of hitting times for the above case is given by the equation below. This equation is 1 less the ...
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2answers
125 views

Which volatility to use?

For calculating the greeks http://www.vollib.org/html/apidoc/vollib.black.greeks.html Should I use historical volatility or implied volatility?
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3answers
142 views

delta hedging strategy for OTM option

Wondering how you would think about the following thought experiment - suppose you sell an OTM call option and plan to implement a delta hedging strategy whereby if the price of the stock were to ...