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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18 views

How discount TVaR of a put option?

Let say I want to calculate the TVaR of a put option. After I simulated possible outcomes in real-world, how do I discount the outcomes? Is there a difference if I am hedged or not? I tried to use ...
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24 views

Price a put option on a CPPI

I want to price a put option on a CPPI using Monte Carlo. I have found so far this article which prices a call on a CPPI. I was wondering if I could use the put/call parity here, and and if so, how ...
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24 views

Literature on “Risky Risky” Method

Trying to get some information/examples on a method called "risky risky" in the context of equity option/convertible bond valuation.
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40 views

Hedge volatility decreases

My particular options positions are typically a long delta, and long vega. Decreases in implied volatility, or specifically the VIX, can drastically alter the profitability of my position. Is there a ...
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1answer
69 views

binomial option pricing model - problem with risk-neutral probability

I have a little problem: in the binomial option pricing model, the price of a european derivative security $V_{n}$ satisfies: $V_{n}=[1/(1+r)]*[\tilde{p}*optionUp +\tilde{q}*optionDown]$ where: ...
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36 views

Impact of Implied skew variations on future prices

I want to test the relationship between of the oil implied volatility skew and oil future prices. I'm lost regarding the method to test the relationship. I was thinking about a regression but I'm ...
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1answer
116 views

In a FX options book, is the sum of P&L equal to the portfolio value?

For a portfolio containing FX options, would the sum of P&L for each option be the portfolio value?
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2answers
108 views

Calculating time value of an option

Can someone provide me with a robust way of calculating the future time value of an option or point in the direction? I have been reading a lot about the factors that affect it and about betas and ...
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2answers
57 views

I have some historical options data, and there are duplicates of some options, how to filter them

I have some historical EOD options data for 2013, and there are duplicates listed for same strikes/expirations. I was told that by the provider that this is due to "special one-time cash payout" for ...
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3answers
304 views

Daily option data

I am wondering where I can pull daily (hourly, by-the-minute, etc. even better) option data for a particular underlying. I would prefer a database I could scrape through and API, but would not mind ...
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1answer
180 views

Backtesting on historical option data

I have downloaded some daily historical option data for a timespan of 10 years and want to perform trading backtests with them. Data are European index options, on ODAX. My question is about realistic ...
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2answers
215 views

How to price exotic options using Monte-Carlo?

I am actually trying to solve some exercise problem using Monte-Carlo and C++ for exotic options. Namely, the exotic options are geometric Asian options and discrete barrier option. It is claimed ...
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1answer
45 views

Does a call calendar lose its entire value if underlying increases well past the strike?

If I buy a call calendar spread, and the underlying increases, both options are in the money by the expiry of the short call. So both options increase in value, but the short one increases less ...
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1answer
107 views

Convert a call spread to a butterfly to mitigate risk

I do not have a source for this (apologies), but sometimes, I hear about option traders initiating a vertical spread(short) and then converting that call spread to a butterfly spread to mitigate risk. ...
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2answers
242 views

Which interest rates to use for options pricing?

I am looking at the historical treasury interest rates and am uncertain which rates would be best to use for options pricing. Should I use 1 month, 6 month, 2 year? See: ...
2
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2answers
180 views

How to compute the VaR for European Call, using the delta-normal method?

I have a European call option with current stock price $S_0$, strike $K$, risk-free rate $r$, volatility $\sigma$, and time to maturity $T$ years. I assume that the stock price at time $t$, which is ...
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1answer
37 views

How to manage risk on a call calendar when underlying is falling

Let us say I bough a call calendar spread. Now, at expiry of the short option, the underlying has decreased significantly, and I am approaching my max loss(i.e both the options are close to 0). In ...
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1answer
57 views

Why vega increases further out in time

Why do back months options have a higher vega than front month options? If possible , kindly explain on an intuitive level without a lot of math.
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1answer
106 views

Why does expected price of OTM option not equal to BS price?

If I assume that stock returns follow normal distribution with drift = 0% and S.D. = 10%. In the long, if I keep investing in this stock for a year with the same capital every year for a consecutive ...
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1answer
45 views

Pricing of a call option in one period binomial model

You are given a $5\%$ call option worth $\$2.66$. The strike price $k$ is $\$41.00$. $S(0)=40$, $Sd=35$ (i.e the lower price of the stock at $t=1$) find $Su$ (i.e the high price of the stock at ...
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1answer
180 views

How to approximate the time to mean reversion for implied volatility

Given an option and its implied volatility, and also the mean value of the implied volatility over the last 30 days, if we find that the current IV is significantly (> 1 std dev.) away from the mean, ...
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2answers
281 views

Why an option has sometimes and implied volatility greater than 100%?

Sometimes, in an option chain, the implied volatility of an option is greater than 100% . How is this possible? I mean, it is possible for 100$ stock to increase more than 100%, but not decrease more ...
4
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1answer
143 views

What does the “-E” mean at the end of a CBOE options symbol?

Below is are some option quotes taken directly from the CBOE website. I am wondering what the -E, -4, -8, -A, -B, -I, -J etc..that are at the end of the options ...
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41 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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2answers
7k 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 ...
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2answers
169 views

Why is the vega of an at the money option so insensitive to movements in volatility? I.e, why do ATM options have such little Vomma?

I've been trying to understand why at the money options have very little vomma. I was reading and came across a graph that showed vega as volatility changes and I couldn't grasp how the relationships ...
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0answers
58 views

Straddle neutral strategy

What does it mean to implement a delta-neutral strategy for straddle ? A straddle consists in buying a call and a put simultaneously, at the same date, on same underlying, with same maturity and ...
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2answers
4k 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, ...
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1answer
100 views

Which volatility to use to price options on futures contract?

I have some questions regarding pricing futures options and I just want to be sure that my thoughts are correct. I am trying to price options on futures for american & european style. In the ...
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73 views

Volatility Surface Constituents, do's and dont's

Recently I have been working a lot with implied volatility and volatility surfaces. The basic idea is easy to follow: 1) Gather market prices of options at different (Strike,Expiry) 2) Calculate ...
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2answers
59 views

Option greeks: sensitivity to 1% move

In a Black&Scholes framework how can I compute the following sensitivities: to 1% move in the underlying price to 1% move in implied volatility I would like the greeks to tell me how many ...
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56 views

How to value an expansion option?

Fair warning this is help with homework. I am not asking for an answer but some guidance or a formula would be nice. I have absolutely no background in finance and this class is online with no ...
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12 views

How does implied volatility of puts relate to strike price in presence of negative news? [duplicate]

There is a lot of literature available but i don't kind understand that if there is a negative news about a stock with the traders why do puts with lower strike tend to have higher implied volatility ...
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2answers
182 views

Is it fair to assume $(ud=1)$ in the binomial tree option pricing model?

I have discussion with my colleague on why a general assumption $$ud=1$$ in binomial tree option pricing model would be necessary? I take it a simplification of the problem, otherwise, there will be ...
2
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0answers
145 views

Why is this delta-hedging/P&L example on a variance swap call correct?

I'm looking into this article about var swaps: http://sbossu.com/docs/VarSwaps.pdf and not sure how to correctly interpret Exhibit 2.1.1. "In this example an option trader sold a 1-year call ...
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3answers
399 views

Any New Discoveries in Quantitative Finance?

It seems like the field has become stagnant in the decades following the enormously successful and influential Black Scholes model. (The original paper has been cited a staggering 25,000 times - more ...
4
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1answer
119 views

What is the mechanism of Asian option?

I have no problem with the mathematical definition of an Asian option. For example, assume the strike price is $K$, the expiration date is $T$, the underlying asset has price $S(t)$, and the payoff is ...
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2answers
161 views

Why is the price of a call option with $K=0$ equal to the price of the stock $S_0$?

In a case of a call option with strike $K=0$, then payoff at expiration time $T$ is equal to: $$(S_T-0,0)^{+}=S_T$$ In reality the price of the option on the date of maturity is never equal to the ...
3
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1answer
154 views

Data Selection for Empirical Pricing Kernel Estimation (Stochastic Discount Factor)

I want to estimate an empirical pricing kernel for an index. Hence, I need to estimate a physical and risk neutral density. For estimating the physical density, only the index data in an observed time ...
2
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1answer
172 views

Some questions about implied volatilities and how to generate theoretical prices when market prices are not available

I am building a little Excel file that take some option prices in input and plots the volatility smile/surface. I have a script that reads market prices from the option chain for 3 different ...
2
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1answer
90 views

Price an option whose strike price is always lower than the future price of the security

Suppose it is known that the price of a certain security after one period will be one of the $m$ values $s_1,\ldots,s_m$. What should be the cost of an option to purchase the security at time $1$ for ...
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2answers
349 views

How to exploit calendar arbitrage?

Say we are looking at European Call options in a toy environment with zero deterministic intereset rates, a stock paying no dividends, no repo rates etc. Let C(T,K) be the price of a call with expiry ...
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1answer
179 views

Gamma is always positive on both put and call

I recently met the claim that for standard put and calls the gamma of the options are always positive. Is this a general result? I am hoping not to assume any model, especially not Black-Scholes.
2
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1answer
408 views

Effect of time to maturity on european put option

Let $C(K,T,S_0)$ denote the price of an European call option with strike K and maturity T on underlying price $S_0$. Assume interest rate $r>0$. Then of course $C(K,T,S_0) \geq 0$ and $C(K,T,S_0) ...
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2answers
83 views

Anybody knows the answer to this exercise found in PWIQF?

I got this question from the last exercise of chapter 2 from "paul wilmott introduces quantitative finance" book. Appreciate your help.
2
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1answer
116 views

Asymptotic behavior of theta of vanilla call option

It is well known that the theta of call option is always negative. Also, the theta of (at the money call option) goes to infinity as the time approaches to the maturity. On the other hands, (ITM and ...
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2answers
139 views

How market making in Index options is done?

I have been thinking about this one for last couple of days. With options on share we hedge on cash and the underlying equity as per Black-Scholes formulation. But I am confused on Index options. ...
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1answer
106 views

Moneyness and option prices

I'm attaching stock prices from CRSP to a dataset of option prices in order to compute the option moneyness. I'm wondering whether I should adjust the underlying prices taking into account splits and ...
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1answer
111 views

How to calculate the probability of 2 options ending in money with different expiration dates?

Lets say I make a trade that consists of buying one put and 2 calls of the same underlying but with different expiration dates and different strikes. Example trade: ...
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1answer
141 views

Historical Implied Volatility Calculation

I'm trying to calculate implied volatility for the FTSE 100 for the last few years. I have all the end of day data from LIFFE for the last few years. I have combined the data by weighting the ...