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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6
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4answers
301 views

Shorting an option every day vs shorting only at maturity

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-...
4
votes
1answer
194 views

VXV vs. VIX futures: arbitrage opportunities?

At a first glance, VXV and VIX futures should not be compared at all: VXV is an underlying index, whilst VIX futures are derivatives written on a different underlying index, that is, VIX. As instance,...
0
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3answers
78 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 ...
3
votes
1answer
78 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 ...
4
votes
1answer
137 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,...
0
votes
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 ...
0
votes
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 ...
0
votes
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 ...
0
votes
0answers
25 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 ...
0
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2answers
74 views

What does this options' data mean?

I've got myself some data on SPX optons which looks like this: ...
5
votes
3answers
135 views

Binary Option in B-S model - technical question

I want to price Binary Option in Black-Scholes model. The payoff is of the form $f(S_{T})=I_{\{S_{T}-K>0\}}$. If we assume that $t=0$ this is easy, because then we have $C_{0}=\mathbb{E}^{*}\...
1
vote
1answer
52 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 $...
0
votes
0answers
82 views

Closing prices for options written on S&P 500

I would like to find closing prices for all options written on S&P 500. I tried OptionMetrics from Wharton School but unfortunately you only find bid and ask prices. Is there any other database ...
5
votes
1answer
60 views

Where to find E-mini S&P options price data or chart?

ES futures price data is easy to find, e.g. on Yahoo finance or with a free NinjaTrader demo account. I'm looking for the same for options on that futures contract. The best I could find is the ...
4
votes
2answers
211 views

How to derive Black's formula for the valuation of an option on a future?

I've got a question about 1976 Black Model and Bachelier model. I know that a geometric brownian motion in the P measure $dS_{t}=\mu S_{t}dt+\sigma S_{t} dW_{t}^{P}$ for a stock price $S_{t}$ leads (...
5
votes
2answers
2k 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 ...
1
vote
0answers
35 views

Effect of surprise dividends on options

The ETF in question is VDC It pays about $2.5 a year in dividends, but the payout dates are very erratic If I were to go long VDC with options, what would be the best way of doing this to avoid ...
2
votes
1answer
98 views

Why is $N(d_2)$ not needed for hedging?

I'm trying to understand delta hedging. If I sell a plain vanilla call option, in order to delta hedge it, I have to buy delta amount of stocks. What I don't understand is that the BS price of the ...
1
vote
1answer
45 views

Effect of different maturity options in delta-gamma-hedging

I read about hedging with options and think i got it. However there is a case am not sure how to handle. Is there any exception in the delta-gamma-hedging-(calculaton-)technique? - say: solve an set ...
0
votes
0answers
58 views

Stock price distribution from options marks

I am reading the following link: on "recovering probability distributions from option prices" - how to subtract influence of stochastic volatility? At the end of the derivation it seems ...
1
vote
2answers
66 views

Black-Scholes and Markovian contingent claim

Background information: Proposition 4.1 - For a European Markovian contingent claim, the Black-Scholes price satisfies $$\Theta(\tau,S) = -\frac{\sigma^2 S^2}{2}\Gamma(\tau,S) - rS\Delta(\tau,S) + rV(...
2
votes
2answers
129 views

$E[F_T] = F_0 \ \rightarrow \ \text{or} \ \leftarrow \ p = \frac{1-d}{u-d}$?

From Ch 12 in Hull's OFOD, we compute the risk-neutral probabilities for a futures contract: Later in Ch 17, futures options are valued, and we have the same result: In relation to ...
0
votes
3answers
50 views

buy asset after exercising call options

Suppose that I buy a call option at \$10 for a stock $S_0 = \$100$, $K = \$110$, expiry date $T$. In $T$, $S_T = \$140$, so that I exercise the option to buy and then sell the assets (buy at $\$110$ ...
2
votes
1answer
69 views

Calculating probability of options with normal/lognormal distribution: does time make a difference?

I'm trying to calculate the probability of a calendar spread resulting in a profit at expiration, when estimating it is modeled as a lognormal distribution, by getting: ...
2
votes
3answers
113 views

What is the theoretical expected growth in an option's value over a given period of time?

Say an option with five years left before maturity has a value of $x$ today. Theoretically, under the B/S framework, what is its expected value in five years (upon maturity)? Do we assume it will ...
1
vote
0answers
104 views

Computation of option vega under CEV

It is easy to define the option vega $\nu=\frac{\partial C}{\partial \sigma}$ under Black Scholes model since volatility is a single quantity. However, under CEV or local volaility model, it is ...
4
votes
1answer
145 views

How to use the Black-Scholes formula with LIBOR rates?

I want to price an FX option using the Black-Scholes model, but I don't know the risk free rate, nor the volatility. I only know the LIBOR rates, the strike, and that the expiration day is 87 days ...
0
votes
3answers
107 views

Put-Call Parity Application

In the binomial model, how that the Delta of a call option $\Delta^{call}$ and the Delta of a put option $\Delta^{put}$ with the same maturity and strike satisfy $$\Delta^{call}_t - \Delta^{put}_t = ...
3
votes
1answer
177 views

Find call and put volatilities using ATM, Risk reversal and Butterflies volatilities

I have to plot the implied volatility surface for EUR/USD. So, my goal is to produce something like that, from put delta 10 to call delta 10: Searching for informations, I found that I could find ...
2
votes
6answers
343 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 ...
3
votes
2answers
225 views

stock option strategies long vs short

What makes an option strategy long or short? I got the impression that if it is a net debit (you pay to open the strategy) it is classified 'long' (strangle, straddle) Then I learned about the call ...
2
votes
3answers
176 views

Option greeks vs Position greeks

I know that when it comes to delta, you would calculate your position delta (of a stock position) as follows: option delta * position size * 100 For example if I ...
2
votes
2answers
251 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 ...
0
votes
0answers
54 views

Why is the probability of first touch equation so complicated?

http://marcoagd.usuarios.rdc.puc-rio.br/hittingt.html The (cumulative) probability distribution of hitting times for the above case is given by the equation below. This equation is 1 less the ...
1
vote
2answers
134 views

Which volatility to use?

For calculating the greeks http://www.vollib.org/html/apidoc/vollib.black.greeks.html Should I use historical volatility or implied volatility?
1
vote
3answers
160 views

delta hedging strategy for OTM option

Wondering how you would think about the following thought experiment - suppose you sell an OTM call option and plan to implement a delta hedging strategy whereby if the price of the stock were to ...
3
votes
2answers
187 views

Risk-Neutral Probabilities, Trinomial Model

My professor has many grammatical mistakes and errors in his questions, so apologies ahead of time. I am just trying to understand what he wants for this question, In trinomial model, let $S_0 = 1$, ...
1
vote
2answers
100 views

Analysis of exercising a call option early

Most options traders sell their call options early instead of exercising them, as you would make a bigger profit this way due to being able to salvage some remaining extrinsic value. For example: ...
0
votes
0answers
52 views

Delta of an option in two cases

Let C be the prime of a call in fi=unction of the price in term F, Strike K, volatilité $\sigma$ and maturity t: $C(F,K,\sigma,t,r) $ We assume that we know $\delta$ $\delta=\frac{\partial}{\...
0
votes
0answers
51 views

Delta hedge compound option

Delta hedge portfolio should be adjusted from one period to the other, as the ratio changes. How does it work with compound options though? Suppose, I have a put on a call option on a stock, in 2 time ...
1
vote
1answer
71 views

Options and bond related to convexity

Relevant definition: Assumption 2.1 (No dominance). If the payoff $P$ of a financial instrument is nonnegative, then the price $p$ of the financial instrument is nonnegative. Notation: $T$ - the ...
4
votes
1answer
94 views

Call options and portfolio of the same options worth less?

A portfolio of long positions in call options with the same maturity and strikes on different assets is worth more than a call option on a portfolio of the same assets with the same weight; i.e. $$\...
3
votes
1answer
131 views

Example of options that cannot be priced with least-square Monte Carlo

Can you give some example of options that cannot be priced with least-square Monte Carlo? Intuitively, this is any option for which a payoff depends on a previous exercise decision. It's relatively ...
0
votes
2answers
280 views

Difference between Closing Price, Last traded price and Settlement Price for option contracts?

What is the difference between Closing price, Last traded price and settlement price ? I got the difference between Closing Price and Settlement price from previous post : The difference between ...
0
votes
1answer
84 views

Open interest and short selling

Open interest of SPY: https://finance.yahoo.com/q/op?s=SPY+Options If someone sell short a contract the open interest adds up or down? The open interest on yahoo finance is a reliable Information of ...
0
votes
0answers
47 views

Hedging portfolio of options with different underlyings

Suppose i have call options for 90 of the 100 stocks of NASDAQ100. How can i hedge the risk using NASDAQ futures? Also, how can I get rid of the residual risk?
1
vote
1answer
48 views

About the Feller Condition in Heston Calibration

I have noticed when reading (many) articles about Heston Calibration that not all (few actually) do care about the Feller condition. Below is a compilation of calibration results from some different ...
0
votes
0answers
33 views

Most recent work on American option **ANALYTIC** pricing

I am studying American options and inquisitive on why they lack an analytic pricing formula. I found a paper by Kim,1990 on analytic valuation of these options and then Byun,2005 paper which studies ...
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0answers
66 views

How was this probability of negative U.S rates by end 2017 calculated?

http://www.bloomberg.com/news/articles/2016-01-26/bets-on-negative-u-s-rates-by-end-2017-jump-above-10-chance Options markets show some investors are taking out protection in case rates instead ...
0
votes
1answer
59 views

out of the money time value versus in the money time value

For an out of the money option the time value is entirely positive, then if it moves into the money the time value has a negative impact on the new intrinsic value, ok, but it looks like the negative ...