# Tagged Questions

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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### What does it mean when a risk reversal is near choice?

I'm currently reading Kathy Lien's 'Day Trading and Swing Trading the Currency Market' and I came across this phrase on risk reversals: "near choice". What does it mean when risk reversals are near ...
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### Solution for american perpetual put

I have been attempting an exercise in which I have to determine the value of an american perpetual put, $P$ in terms of the asset value $S$. The solution to the exercise says: When $S>S_f$ (the ...
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### How to hedge a barrier option with vanilla options?

I want to hedge a barrier option, say a knock-out call with strike K and barrier B out-of-the-money. My idea was to start from the payoff diagram of this option, and try to accomodate it with vanilla ...
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Consider a butterfly spread with strikes $K_1, K_2, K_3$. My professor wrote the model price, $V$, was equal to the following: $$V = exp(-rT) * P(K_1<S_T<K_3) * (1/2) \Delta K$$ where $\Delta K ... 2answers 179 views ### How to calculate Implied Volatility for out-of-the-money options? I'm trying to calculate the implied volatility for out-of-the-money options, and to a lesser extent, in-the-money options. Most of the literature estimations I could find for implied volatility were ... 1answer 74 views ### Arbitrage opportunity in discrete time Say we have the following binary option$B$on asset$S$with strike K and expiration time T, assume also that the following relation holds at time$0$:$B > N*C(K,T)-N*C(K+1/N,T)$Where$N$is ... 0answers 47 views ### Capital increase: which stock price to use as input to Black-Scholes formula? For an exercise we have to calculate the theoretical value of a scrip / preferential right on its issue day (23 April) in the context of a capital increase. The scrips are issued on 23 April. The ... 1answer 41 views ### Old CBOE SPX options data: listing and expdate issue I can't figure out the logic behind SPX option data for 2008-2009 years. First, all traditional SPX options have exp_date on the third Saturday of each month. How can it be? Why not Friday? Second, ... 1answer 30 views ### how to compute the risk free rate for a given maturity of an option contract? i'm working on options with different maturities. I need to correspond a risk free rate for each maturity. What rate should i consider as risk free rate? thank you. 1answer 113 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 ... 3answers 63 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 ... 1answer 57 views ### Option pricing: Risk neutral probability calculation Let$u=1.3d=0.9r=.05S(0)=50, X = \text{strike} = 60$. Assume binomial model Why isn't the risk neutral probability found by solving the following for$p$:$$E[S(T)]=p65+(1-p)45=S(0)(1+r)^T=... 1answer 93 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 ... 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 ... 0answers 46 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 ... 1answer 58 views ### Put-on-call option confusion So the question asks: Given a 3-steps Binomial Tree model with$S(0) = 50$,$U = 20%,D = ô€€€20%$, and$R = 5%$. A European call option has the strike price$X = 40$and maturity time$T = 3$. Also, a ... 1answer 44 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 ... 1answer 83 views ### Replication strategy of European call option So the question asks: L et$S(0) = 120$dollars,$u = 0.2$,$d = âˆ’0.1$and$r = 0.1$. Consider a call option with strike price$X = 120$dollars and exercise time$T = 2$. Find the option price and ... 1answer 63 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 ... 3answers 98 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, ... 2answers 221 views ### The Upper Bound of an American Put Option I have just read the following paragraph (in bold) and have a question on the upper bound of an american put option: http://www.sharemarketschool.com/option-valuation-upper-and-lower-bounds-part-... 3answers 81 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 ... 1answer 150 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 volatility...Mathematically,... 0answers 15 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 ... 1answer 79 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 ... 1answer 112 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 ... 2answers 41 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 ... 0answers 33 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 ... 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 ... 2answers 75 views ### What does this options' data mean? I've got myself some data on SPX optons which looks like this: ... 1answer 53 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$...
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 time-to-...