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.
6
votes
2answers
568 views
Can one use options on Treasury futures to hedge a portfolio?
Can one use options on Treasury bond futures to hedge a typical fixed income portfolio? If so, how can one estimate the duration for an option on a Treasury futures contract, and taking this a step ...
6
votes
1answer
757 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 ...
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
1answer
237 views
How sensitive are vertical spreads to changes in implied volatility?
How sensitive are vertical spreads to changes in volatility / implied volatility in the money, at the money, and out of the money?
I'm thinking for 1 point spreads this would be very small / neutral ...
6
votes
1answer
325 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 ...
6
votes
1answer
233 views
Can options volume have an impact on the price of the underlying asset?
Can options volume affect the underlying asset price indirectly? I know that options buying/selling does not directly affect the price of the underlying asset (rather, the asset price contributes most ...
6
votes
3answers
306 views
Parameters for pricing option on EDF
Ladies and Gents,
Im writing a quick routine to calculate implied vols for options on EUR$ futures with Bloomberg data. My question concerns the part where I have all my inputs and am ready to pass ...
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 ...
5
votes
2answers
800 views
How to extrapolate implied volatility for out of the money options?
Estimation of model-free implied volatility is highly dependent upon the extrapolation procedure for non-traded options at extreme out-of-the-money points.
Jiang and Tian (2007) propose that the ...
5
votes
2answers
422 views
What are the major models for energy derivatives, particularly electricity derivatives?
Aside from Black-Scholes with crazy skews, what major models are used for energy derivatives? I'm thinking particularly of electricity derivatives, but I'm also interested in natural gas and other ...
5
votes
2answers
582 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 ...
5
votes
2answers
242 views
What changes to put-call parity are necessary when evaluating american options on non-dividend paying assets?
If an underlying doesn't pay dividends (for our purpose defined as any distribution to the underlying's holder) directly or indirectly (e.g. options on futures) how does put-call parity change from ...
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 ...
5
votes
2answers
796 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 ...
5
votes
1answer
695 views
How would I value a perpetual bond with an embedded option?
I am trying to work out how to value the following transactions. It should be straight forward, since it breaks down into a series of well known instruments, yet I am not sure how to evaluate it:
...
5
votes
1answer
3k views
What is a Heat Rate Option?
I tried a search with google but I can't find a clear definition of what a Heat Rate Option is. I would appreciate if someone could explain to me what this type of option is. My understanding is that ...
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 ...
5
votes
2answers
219 views
How can one determine approximately what percentage of options trades are buyer-initiated vs. seller-initiated?
How can one determine approximately what percentage of options trades are buyer-initiated vs. seller-initiated? What measures of order flow are available specifically for options, preferably for ...
5
votes
1answer
174 views
Modeling liquidity effect on option prices
What are practically useful ways of modelling the effect of liquidity on options?
5
votes
1answer
339 views
How to calculate equivalent futures position?
Let's say I have the following two positions:
Buy ATM SPX call, expires in 1 month
Sell ATM SPX put, expires in 1 month
This creates a synthetic futures position. How do I calculate how many ...
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
1answer
148 views
Quantifying Hedging Error Due To Expiration Day Range?
Let's say I have two call option liabilities that I want to statically hedge with a single call option.
Liabilities:
Liab_Call_1:
Strike: 100
Notional: 1000
DaysToExpiration: 20
Liab_Call_2:
...
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 ...
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 ...
4
votes
2answers
1k 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 ...
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 ...
4
votes
5answers
550 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 ...
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 ...
4
votes
2answers
307 views
What does put-call parity imply about option premiums?
We know that $$C-P = PV(F_{0,T}-K)$$
When we create a synthetic forward, we buy call and sell a put at the same strike price $K$. When we buy the call why do we assume the premium is positive? When ...
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 ...
4
votes
3answers
268 views
Given markets usually fall fast and rise slowly, are there trading mechanisms to take advantage of this?
Per a previous question on this topic -- markets generally fall fast and rise slowly: what options strategies or other strategies can one use to take advantage of this common occurrence?
4
votes
1answer
714 views
Simple model for option premium (for covered call simulation)?
Given a historical distribution of weekly prices and price changes for a stock, how can I estimate the the option premium for a nearly at-the-money (ATM) option, say with an expiration date 3 months ...
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 ...
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 ...
4
votes
1answer
338 views
How to apply quasi-Monte Carlo to path-dependent options?
Following up on my recent question on variance reduction in a Cox-Ingersoll-Ross Monte Carlo simulation, I would like to learn more about using a quasi-random sequence, such as Sobol or Niederreiter, ...
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 ...
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 ...
4
votes
1answer
167 views
Standard Deviations out the money where options will respond to underlying asset price changes
Is there an understood way of determining how far out the money an option can be, before it starts/stops responding to the underlying asset price changes?
I usually look at the greeks, gamma, delta, ...
4
votes
2answers
543 views
How to derive appropriate volatility for a binary option (with strike/term) from market data?
I am valuing a binary FX option (european) with a defined strike and term (2Y). I'm using a closed form solution based on Black-Scholes framework. How can I derive the appropriate volatility to use ...
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 ...
4
votes
1answer
1k views
How to replicate a digital call option
Call Option S=100 K=100 Payoff=1 (option is not available) How can i replicate this (payoff) with calls and puts with strike prices with multiples of 5$
Thanks for help
4
votes
2answers
436 views
Heuristics for calculating theoretical probabilities of being ITM at time T for listed options
I'm looking for a heuristic way to calculate the probabilities of being in the money at expiry for non-defined risk options combinations (listed options).
I use delta as a proxy for this probability ...
4
votes
1answer
364 views
Need historical prices of EUREX American and European style options
I am trying to get the historical price data on selected American and European style options at EUREX. I am not familiar with their system. Does any one know whether they have something like yahoo ...
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 ...
3
votes
4answers
710 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 ...
3
votes
2answers
279 views
Why do ATM call options have a delta of slightly bigger than 0.5 and not 0.5 exactly?
From the formula of the delta of a call option, i.e. $N(d1)$, where $d_1 = \frac{\mathrm{ln}\frac{S(t)}{K} + (r + 0.5\sigma^2)(T-t)}{\sigma\sqrt{T-t}}$, the delta of an ATM spot call option is ...
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 ...
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 ...
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 ...
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 ...
