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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2k views

using quantlib function in my c++ program

I want to include the QuantLib function for option greeks calculations in my own C++ code. My question is: can I just include those functions? I don't want to use the rest of their stuff. I obviously ...
1
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1answer
85 views

Price volatility and yield volatility

This question is a bit confused, but please bear with me. Now and then I see people use the terminology "price volatility" and "yield volatility" in connection with bond options. I understand the ...
2
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1answer
92 views

QuantLibXL - Optionlet bootstrapping failure

I am trying to bootstrap the Optionlet volatility surface from a Cap/Floor volatility surface using QuantLibXL. To be specific, the data is from ICAP: ...
2
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2answers
144 views

Options with a stochastic strike

Do options where the strike itself is a stochastic process exist? If they do - what are the motivations for such a product and where is it used ? Example: Call-Option with stochastic strike: ...
5
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0answers
175 views

On the interface between Quant finance and actuarial-science/insurance-math

Actuaries (at least in Europe) are frequently severily lacking in quant finance topics. At best they are familiar with B&S model. People going into quant finane or striving to become a quant on ...
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0answers
119 views

Mock/practice trading for options (delta/gamma hedging etc.)

I know there are some sites for practicing equity investing. But could you provide me with suggestions concerning options trading etc. I read Natenbergs book on Options and want to test things like ...
2
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2answers
273 views

How do I calculate probability distribution of stock prices given option prices?

I'd like to calculate a probability distribution for prices given the option prices for that stock? Any ideas how to do this? My desire is to do this daily and then see how the price PD changes over ...
2
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1answer
182 views

Call option on a Mutual Fund

I am trying to price a call option on a mutual fund. Given the lack of market implied data, I am going to estimate the fund´s expected volatility using as a reference its historical volatility ...
2
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1answer
127 views

Implied probability density (Question 2 - Applications and Interpretation)

Using the second derivative of the Call-Option-Price one can try to recover the pricing density. Formally: Assuming a constant interst rate $r$ and also not making any assumptions on the model ...
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1answer
96 views

Volatility tools / web sites?

Could someone give recommendations regarding volatility tools / web sites that they find useful? I am looking for information that my brokerage platform does not provide. Specifically, I want to see ...
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0answers
123 views

Monte Carlo American Option Pricing under GARCH(1,1) volatitliy

I am attempting to price a couple of at-the-money American option using the LSM algorithm and GARCH(1,1) volatility. The LSM code I have works correctly for constant volatility, however, when I switch ...
1
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1answer
156 views

Implied state price density (Question 1 - derivation of the formula)

I came upon the term "implied state price density" in a couple of papers. As far as I understand the concept one basically tries to extract the "pricing density" from the market data. For the sake ...
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2answers
378 views

Delta Neutral / Gamma Neutral Positions

I've been trying to find out more about options positions which are both delta neutral and gamma neutral--created with some kind of calendar spread. Supposedly, such a trade will be perfectly hedged ...
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0answers
71 views

Zakamouline Optimal Hedging of Options with Transaction Costs

I've read that the Zakamouline method suggests the best optimal hedging of options when taking transaction costs into account. I've read the article but am having difficulty understanding it well ...
5
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2answers
204 views

Algorithmical replication of a profit and loss function using different options

I often see questions like "Given this payoff graph (example below), construct a portfolio that replicates it." I want to know if there is an efficient method/algorithm to find the individual pieces ...
1
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1answer
154 views

Pre-trade evaluation and risk assessment of option trading strategies (in market practice)

When a trader gets conclusion of the volatility is being underestimated (via volatility cone or some other technology), actually there are multiple ways for his trading. (Let's assume the underlying ...
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2answers
208 views

Risk management of options

Your client would like to buy a digital call option. the digital call option pays the buyer in one years time (i.e at maturity ) N=1m SGD, if the SGD USD spot rate at maturity is above a prescribed ...
2
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0answers
44 views

Forecasting amount of slippage in executing option spreads

Is there a good quantitative model to estimate how much slippage is required to execute a particular option spread trade? For example, let's say you want to execute an Iron Condor. Given X, Y, Z ...
0
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1answer
263 views

Asset-or-nothing Option Valuation in the Black and Scholes model

In standard Black-Scholes Model, compute the price of an asset-or-nothing put and asset-or-nothing call options. Write down the put-call parity relation between the asset-or-nothing call and put ...
3
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2answers
102 views

Effect of interest rate on options prices

This might be another basic derivatives question. When interest rate rises, stock prices generally fall. Assuming an option's underlying is a stock, this should lower the option's price as well. ...
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1answer
139 views

How to hedge a forward contract

I was asked this in an interview and I messed it up lol. This might actually be really basic. Let's say I signed a forward contract to buy NASDAQ at 4000 one year from now. How can I hedge this cash ...
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2answers
106 views

Practical equity options pricing

To price a vanilla option, the following information are required : Strike price; Underlying price; Volatility; Maturity; Dividends rate; Repo rate; Interest rate; The strike, underlying price, ...
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0answers
103 views

Does Bakshi, Kapadia and Madan (2003) VIX building approach underestimate volatility?

From a paper that shortly addresses an alternative approach to VIX-like index building: To test this approach, I've built a fake book of B&S options with constant volatility equal to ...
7
votes
2answers
242 views

Extrapolating implied volatilities to small time

Could anyone please direct me to literature or methods for extrapolating the implied volatility surface towards small expiry? I'm looking to price very short time to expiry binary options (e.g. 5 ...
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2answers
129 views

Basket Option weight sensitivity calculation

I am looking to find/estimate the "greeks"/option price sensitivities/derivatives for a basket option situation. In specific the change in price of a put option associated with a change in weight of a ...
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1answer
132 views

binary tree options pricing model with dividend value - How should I discount the option at?

the expected value of the option given the next period up, down values is: $ Pexp = (p Price_{next, up} + (1 - p) Price_{next, down})/R$ where p is defined as $p = \frac{\exp(-r \times \Delta t) - ...
2
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1answer
464 views

IB API quotes and speed

The title says it all. I trade futures options exclusively and wanted to see if anyone had insight into the quote speedsrobustness coming into the API. I'm using the Excel DDE right now just building ...
2
votes
1answer
212 views

How to replicate this option?

I have a question I am not sure how to approach: Suppose interest rates is 50%, a stock worth \$1 today can be worth \$2, \$1, \$0.5 next year. If the option that pays \$1 only when S = \$2 is ...
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8answers
4k views

Why does implied volatility show an inverse relation with strike price when examining option chains?

When looking at option chains, I often notice that the (broker calculated) implied volatility has an inverse relation to the strike price. This seems true both for calls and puts. As a current ...
2
votes
3answers
188 views

Is it wrong to use 'real world' probabilities for option valuation?

Is it wrong to use 'real world' probabilities for option valuation, even when the market is not liquid enough to delta hedge the option? My instinct is that it is wrong, because the time value of ...
9
votes
1answer
333 views

Appropriate measure of Volatility for economic returns from an asset?

I am doing research on uncertainty analysis and risk assessment for oil field development. For doing economic forecast and valuation I use Real Options theory, which is almost similar to theory used ...
6
votes
1answer
450 views

What is the best method to compute project volatility in Real Option Valuation?

There are few methods like Copeland-Antikarov, Herath-Park, Cobb-Charnes etc. to compute project volatility, however these methods compute upward biased volatility. What is the best method I could ...
2
votes
2answers
134 views

Lower bound of ITM Calls when computing Implied Volatility

Assuming the Black Scholes model and pricing formula of a European call option. Then, if the call is ITM, i.e. if $ln(\frac{S}{K})>0$, the $d_1$-term will go towards infinity as $\sigma$ goes to ...
10
votes
3answers
1k views

When does delta hedging result in more risk?

There's a question in an interview book saying "when can hedging an options position make you take on more risk?" The answer provided is that "Hedging can increase your risk if you are forced to both ...
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votes
3answers
285 views

Papers and algorithms on bidding schemes for best order execution?

I'm building an automated option trading bot that executes common options multi-leg strategies (straddles, spreads) and I want to learn the best way to execute my orders. As you know, the bid-ask ...
3
votes
1answer
239 views

what's the relationship between forecasted stock volatility and implied volatility?(option)

what's the relationship between forecasted stock volatility and implied volatility? I know that implied volatility is the volatility calculated by BS formula, is there any relationship between implied ...
1
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1answer
118 views

probablity expiring in the money ..basic question

Everyone says $N(d_2)$ is the probability of the option being exercised but stocks that have really high volatility have really expensive options indicating a high likelihood of expiring in the money. ...
2
votes
2answers
153 views

Time-zero price of two specific contingent claims

I am unsure how to start with the following problem. I have two contingent claims where contingent claim (1) pays $\int_0^T S_u du$ and contingent claim (2) pays $(\log S_T)^2$ at time $T$ Now I ...
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1answer
275 views

Price of a down-and-out call in terms of European call

If $EC(S_0, K, \sigma, r, T)$ represents the price of a European call option with strike $K$, expiry $T$, initial price $S_0$, volatility $\sigma$ and where the constant interest rate is $r$, then I ...
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1answer
117 views

Lattice Boltzmann method for pricing options

I'm looking into whether there is ANY information out there regarding the implementation of the Lattice Boltzmann method for pricing options (or other financial tasks). I am very new to the world of ...
7
votes
1answer
252 views

Inflation modelling

I am trying to price an option on the Spanish CPI. The option is a European call with a single observation date. However, I am fairly new to inflation modelling, so there are two areas in which I ...
2
votes
0answers
39 views

How to interpret CME's specification regarding grains options expirations?

Looking at the contract specifications for Soybean Meal and Soybean Oil (same for Corn, Wheat, and other major stuff I checked) serial options on CME I see the following expiration rule: the last ...
4
votes
5answers
5k 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 ...
13
votes
6answers
1k views

Why are options trades supposed to be delta-neutral?

I'm reading Natenberg's book, and he says that all options trades should be delta neutral. I understand that this prevents small changes in the underlying price from changing the price of the option, ...
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1answer
89 views

Calculating deltas of call options?

From a continuous standpoint, I understand why an ATM call has delta = 0.5 and for ITM call, the delta approaches 1 since each move in the underlying corresponds to same unit of value change in call ...
2
votes
2answers
2k views

How to Delta Hedge with Futures?

The theory of delta hedging a short position in an option is based on trades in the stock and cash, i.e. I get the option premium and take positions in the stock and cash. In the classical ...
2
votes
5answers
6k views

Why do some people claim the delta of an ATM call option is 0.5?

I am looking for a mathematical proof in terms of differentiating the BS equation to calculate Delta and then prove it that ATM delta is equal to 0.5. I have seen many books quoting delta of ATM call ...
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2answers
149 views

How is holding an European call option equivalent to holding an asset-or-nothing call option and writing a cash-or-nothing call option?

The cash-or-nothing call option has a payoff that is equal to the strike price. All three options have the same expiry date.
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2answers
560 views

Drawbacks of Black-Scholes option pricing model

Will highly appreciate if anybody can provide logical financial proof why the Black-Scholes option pricing model overestimates the value for long-term options as described in this paper "Warren ...
5
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1answer
949 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 ...