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
121 views
How do I model risks for specific short-term short calls in a portfolio with limited data?
I'm trying to do some risk analysis on a portfolio of bonds, currency, stocks and short calls. The short calls expire in approximately 15-30 days and I've only got around 20 days of pricing data on ...
2
votes
1answer
140 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 ...
6
votes
4answers
477 views
Why the interest rate for put-call parity is not constant?
Usimg the put-call parity
$C - P = S - K ยท e^{-rt}$
I tried to estimate the value of $e^{-rt}$, the present value of a zero-coupon bond that matures to 1 in time $t$:
$e^{-rt} = (P - C + S) / K$
...
3
votes
2answers
760 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 ...
7
votes
2answers
459 views
When to use Monte Carlo simulation over analytical methods for options pricing?
I've been using Monte Carlo simulation (MC) for pricing vanilla options with non-lognormal underlyings returns.
I'm tempted to start using MC as my primary option-valuating technique as I can get ...
1
vote
1answer
208 views
Portfolio Greek Exposure Equations
What are the calculations for calculating greek exposures in a portfolio of equities and equity options? I think I have them but I want to be sure. Are these correct (for vanilla options)?
...
5
votes
2answers
521 views
VIX = Vega of S&P500 options?
ok, so let assume I can predict the daily change in the VIX itself (in points) every day. what would be the best way to play this with OPTIONS? well, obviously VIX options, but if I can look at the ...
1
vote
2answers
327 views
Multi asset option portfolio risk management (greeks and FX exposure)
I am running an options book containing listed options across multiple products. I trade mostly equity and index related options - with a preference for European expiration products. I trade products ...
2
votes
1answer
145 views
Is there any evidence that an option delta approximates ITM expiry probability?
Several sources (online and offline) that discuss the delta of a listed vanilla option, state that its delta is a (guesstimate?) of the probability of said option expiring ITM (in the BSM framework).
...
1
vote
1answer
116 views
Brent Crude Data
I am trying to locate historical volatility data (5+ years) for Brent Crude? Does anyone know where I might be able to source such data?
2
votes
2answers
314 views
Why don't options traders use charts? Or do they?
Retail trading platforms typically offer equity charts but only instantaneous quotes on options. It seems like even a few minutes of historical data would be useful when entering an order. Are charts ...
2
votes
3answers
272 views
Basic question about Black Scholes derivation
In the derivation of the Black Scholes equation, the value of the portfolio at time $t$ is given by
$$P_t = -D_t + \frac{{\partial D_t}}{{\partial S_t}}S_t $$
where $P_t$ is the value of the ...
0
votes
1answer
166 views
Exotic option pricing
I'm trying to price an option with payoff $\max\{a\cdot S_t - K,0\}$ where $a$ is a known constant. Ideally I'm looking for a closed form, continuous-time solution. Where should I begin?
6
votes
1answer
173 views
Prove or disprove “If at least 10% of an option's value is time value, it has a delta less than 90”
"If at least 10% of an option's value is time value (ie. time value >= 0.1*call price), it has a delta less than 90".
In practice and after doing many tests with an option pricing calculator, this ...
3
votes
1answer
386 views
Science behind options pricing into Earnings event
I am wondering about studies regarding the uncanny options pricing into public company's earnings reports.
The phenomenon being that the price of a straddle before earnings costs near exactly the ...
2
votes
0answers
85 views
Option symbol conversion [closed]
Maybe more of a programming question,
Is there a Ruby gem to facilitate conversion of an option symbol notation from one form to another?
For example, one source provides TZA1220J18
but an API for ...
3
votes
0answers
110 views
Arbitrage free price of a derivative when the price is collected over the lifetime of the derivative
Let $X_t$ be an american style financial derivative with random exercise time $T$
where $t$ and $T$ belongs to some finite set $A$.
Buying this derivative requires the buyer to pay $p_t$ up to time ...
3
votes
1answer
82 views
Do Bond Put Dates always fall on Coupon Dates (for non-zero coupon bonds). Calculation rules for Coupon Dates
This may not be the most appropriate SE site to ask this question, but I can't seem to find a better place to ask, so here goes:
Do Puttable Bonds' put dates always fall on Coupon Dates? When they ...
5
votes
3answers
733 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 ...
-1
votes
2answers
180 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 ...
1
vote
1answer
178 views
Calculate historical (ATM) option prices with public data
I just saw the question How to calculate the most realistic historical option prices with additional publicly available parameters and I am interested in the step before that.
How can I calculate ...
2
votes
0answers
64 views
Any thoughts on how Warren Buffet's B of A warrants might be “marked-to-market” by either counterparty?
It's not too long since Berkshire Hathaway got its 10-year warrants in Bank of America alongside its \$5 billion purchase of preferred stock. At the time I saw some discussion about the value of ...
1
vote
3answers
1k 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 ...
6
votes
1answer
745 views
What is the best live options data API?
What is the best/cheapest service to get real-time (as real-time as you can get) on stock options?
I'm looking for the fastest update on the ENTIRE market, with a few stocks prioritized, so I need ...
2
votes
0answers
90 views
How to find the upper bound of a digital option given some market data?
Given the price of a call equals to 5 with Strike 100, please find the upper bound (sup) of the digital option with strike 105.
I am not sure about the solution, but I write the condition like this,
...
10
votes
5answers
445 views
Is it ever possible that---because of illiquidity---exercising an out-of-the-money option is better than directly buying the stock?
Is there a case, where due to illiquidity, exercising out-of-the-money options could be better than directly buying the stock?
When a stock is too illiquid, there are some costs because of this ...
8
votes
3answers
424 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 ...
7
votes
1answer
220 views
When pricing options, what precision should I work with?
I'm wondering if there's any point at all in double-precision calculations, or whether it's ok to just do everything in single-precision, seeing how the difference on non-Tesla GPUs for single and ...
3
votes
1answer
341 views
Can American options with no dividends and zero risk-free rate be treated as European?
Let's say you've got American options on a future of a stock index. There are no dividends, and no risk-free rate either (assume $r=0$). Can these options then be treated as European from the ...
2
votes
0answers
107 views
What is the highest frequency greek for options on futures on bonds?
I'm considering exchange traded options of futures on bonds. Options on bond futures are usually American, thus the Black model is out of question. Which is the most imporatant Greek with respect to ...
5
votes
1answer
273 views
What are VIX back-month futures based on?
The VIX calculation is a weighted average of prices for front-month out-the-money options on the S&P index.
So for VIX futures, this makes sense for the front month vix futures (being based on a ...
5
votes
2answers
795 views
Implied Volatility from American options (binomial)
I am trying to get the implied volatility from options on commodity futures and I know it's possible to get it from the binomial american options (on an non-dividend paying stock).
I believe it is ...
7
votes
2answers
646 views
How to calculate the most realistic historical option prices with additional publicly available parameters
This is a follow up question of this one.
My aim is to create the most realistic historical option prices possible with publicly available data. I want to do this for backtesting purposes.
The ...
4
votes
2answers
337 views
Does put-call parity hold for a compound option with underlying American option?
Say there is an American put option that expires $N$ months from today.
A call-on-put (CoP) option provides the owner the right to buy the American put option in exactly $M < N$ months (but no ...
3
votes
0answers
129 views
How companies choose earnings release dates, & effect on Implied Volatility
A company's earnings release date significantly affects weekly or monthly option prices/implied volatility. For companies that typically release earnings on the cusp of monthly options expiration, ...
5
votes
2answers
581 views
Constructing an approximation of the S&P 500 volatility smile with publicly available data
Besides of the VIX there is another vol datum publicly available for the S&P 500: the SKEW.
Do you know a procedure with which one can extrapolate other implied vols of the S&P 500 smile with ...
3
votes
1answer
182 views
Eurodollar Options Stike Price > 100 bps
Looking at Eurodollar IR options market data coming down from CME, I can see a whole host of options where the strike is > 100 bps.
My understanding in this case is that puts will always be in the ...
4
votes
1answer
283 views
Modified bisection formula for deriving implied volatility for a dividend paying american option
I am trying to work out the formula for calculating the implied volatility of an american option on a stock paying dividends (discrete payments or annualized yield).
On page 171 of Haug
The ...
2
votes
2answers
475 views
How to calculate COMPOSITE underlying implied volatility from ATM (near month) option prices?
I am trying to calculate the implied volatility of an underlying given observed prices of call and puts. There are two scenarios:
The ATM strike is pinned by the market (i.e. underlying level == ...
-4
votes
1answer
134 views
Can you help identify/name this equity options strategy? [closed]
I am thinking of making such a trade:
BUY PUT $590 MARCH
WRITE PUT $600 APRIL
I have done some reading and it looks like a diagonal put spread, but the diagonal ...
6
votes
2answers
1k views
What causes the call and put volatility surface to differ?
I currently have a local volatility model that uses the standard Black Scholes assumptions.
When calculating the volatility surface, what causes the difference between the call volatility surface, ...
8
votes
1answer
273 views
What drives changes in implied volatility on ETFs/ETNs?
I thought implied volatility, as well as the VIX, primarily increase due to increases in the underlying asset's volatility, as well as the options themselves being bid up because more people were ...
7
votes
3answers
890 views
How to obtain true probabilities from Black-Scholes?
How to obtain true probabilities from Black-Scholes option pricing equation?
Suppose, that we know risk adjusted discount rate for the underlying asset (the drift term in the physical measure) and ...
0
votes
1answer
485 views
what is the best way to calculate the probability of an equity option ending in the money?
Given historical implied volatility and all other know variables (stock price, option strike price, option expiration date, dividend rate, interest rate) what is the best way to calculate the ...
1
vote
2answers
457 views
Can we replicate a call option without borrowing and make it cheaper in this way?
I learned how to price a European call option using this video lecture. The considered case is very simple. The call option gives the right to buy 100 Euros for 100 Dollars in one month from now. The ...
11
votes
2answers
417 views
What benchmark/index to use for backtesting a portfolio of stock options?
What benchmark should I use for backtesting a model for when I should buy an option of a particular stock? For equities, one could say their portfolio outperformed the S&P 500. I would like to ...
12
votes
2answers
422 views
Can you fully hedge an option in the presence of counterparty risk?
The derivation of the Black-Scholes model assumes no counterparty risk. Does the presence of counterparty risk invalidate the argument behind the model?
EDIT: The question is about options in ...
6
votes
4answers
1k views
How does an option's time value depend on moneyness?
How does an option's time value (also known as extrinsic or instrumental value) depend on how far it is in the money or out of the money? In other words, how does the time value change as the ...
-6
votes
3answers
484 views
True or False? An option's price will always be greater than or equal to its intrinsic value
Since if the option's price is lower than its intrinsic value (eg. strike price - current stock price for puts), then an arbitrage opportunity arises from buying the option at bargain and then ...
2
votes
4answers
375 views
how expected moves are priced into options
I understand that expected price changes of underlying assets are usually priced into options, but I don't understand how.
For instance, before upcoming earning reports the option values are inflated ...
