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
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
282 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
470 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
133 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 ...
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 ...
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, ...
-6
votes
3answers
472 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 ...
7
votes
3answers
884 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
477 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
456 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
417 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
1answer
236 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 ...
2
votes
4answers
371 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 ...
3
votes
1answer
248 views
Which approach is better for modeling option exercise strategies, rational or behavioral?
This question is most relevant to the evaluation of embedded options, such as the refinancing option granted to borrowers in the mortgage and bank loan markets, or the call option present in some ...
7
votes
2answers
1k views
Are there comprehensive analyses of theta decay in weekly options?
Are there comprehensive analyses of how much theta a weekly options loses in a day, per day?
I know what the shape of theta decay looks like, in theory, where the decay towards zero happens more ...
9
votes
3answers
775 views
How to solve for the implied stock lending rate given equity options prices?
When market makers price options on hard-to-borrow equities, they include the cost to borrow the underlying equity that their broker is going to charge them to sell the security short to hedge. I'm ...
5
votes
1answer
684 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:
...
7
votes
1answer
120 views
How to handle coupon payments when pricing a bond with an embedded option?
I'm using a binomial tree to price a bond that has an embedded call or put option.
On every node that has a coupon payment, do you include the coupon payment then max/min out the value, or do you ...
4
votes
1answer
336 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, ...
3
votes
0answers
81 views
Analysis of Unbalanced Covered Calls
Hello I am doing an analysis on covered calls with and extra amount of naked calls. Ignore the symbol and current macroeconomic events.
I couldn't find any reference to this strategy (unbalanced is ...
1
vote
2answers
123 views
Buying one company or index against another, is this readily possible with options, with an accurate return (also Alpha Indexes)
There's a relatively new product in the market / on the Nasdaq called Alpha Indexes. It lets one own a company -- e.g. Apple, GE, Google, etc -- as the difference between how that company does (the ...
4
votes
3answers
267 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?
0
votes
1answer
148 views
Does an option's price “ratio” with the underlying security price?
I'm trying to understand option pricing better.
Let's say security ABC is \$40, and a 38 PUT option with 40% implied volatility (and 90 days till expiration) is priced at X. If security ABC then ...
0
votes
0answers
95 views
Make assumption about future stock price: is the option with best return fairly clear? [closed]
If a security has price X now, and one makes the assumption it will have a greater price Y later, is the option (or option spread) that will provide the best return fairly clear, including the ...
3
votes
1answer
111 views
What are good conditions to roll a leap further out in time?
If you're hedging with a back month / leap option, what are good underlying / market conditions to move this option out even further in time?
For simplicity, let's say you own a call with 6 months ...
5
votes
2answers
240 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 ...
9
votes
2answers
227 views
When is it rational to exercise a bond option early?
Consider american options on interest rate futures such as the 10-year treasury note. When is early exercise optimal?
6
votes
1answer
231 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 ...
1
vote
1answer
258 views
Calculating Theta assuming other variables remain the same
Is there any way to calculate theta at X day in future based solely on knowing
1) Total Current Option Price
2) Days Till Expiration
How would this be done? Thank you
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, ...
2
votes
0answers
160 views
Tian third moment-matching tree with smoothing - implementation
I was wondering if someone has an implementation of the Tian third moment-matching tree (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1030143) with
smoothing in code (e.g. c++, vba, c#, etc.)?
...
5
votes
2answers
786 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 ...
2
votes
1answer
172 views
In a covered call strategy, should I hold the call or sell/roll if the delta becomes too small?
I am tweaking a covered call algorithm. The short leg consists of out of the money call options. The goal is to collect the tim premium, but an equally favorable circumstance is when the call ...
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 ...
7
votes
2answers
182 views
What do we really mean by put-call ratio and how should it be expressed?
I need to calculate the put-call ratio for an American option. But I'm a complete naïf: I don't know how. I think I'd use the put open interest and the call open interest. I can imagine two ways to ...
11
votes
3answers
2k views
Papers about backtesting option trading strategies
I am looking for all kinds of research concerning option trading strategies. With that I mean papers that publish results on different option trading strategies properly backtested with real-world ...
1
vote
0answers
217 views
Delta-Omega Hedging [closed]
I am currently trying to understand the in's and out's of options and more specifically hedging. I came across a document that was talking about Delta Hedging which is just making sure the delta of ...
2
votes
1answer
372 views
What exactly is the annualized forward premium?
A forward contract has a premium of $ 0$ because it is an obligation to buy or sell something in the future (hence there is more risk). Call and put options, on the other hand, have premiums of $C$ ...
6
votes
2answers
191 views
What is more appropriate: the EMA of the option price or the EMA of the underlying?
I'm progressing, all too slowly, on a site that aims to show real-time numbers for options that are listed on the CBOE. Most of the instantaneous numbers are all set. Now I'm going to pay attention to ...
-4
votes
1answer
208 views
What is the net premium of a bull spread option? [closed]
Suppose we have the following information for the index $S$:
current price = $ \$1000$
risk free rate $4 \%$ convertible semiannualy
What is the net premium to create a $ \$ 1000- \$ 1050$ bull ...
8
votes
1answer
178 views
How should FX options be priced when a currency is artificially capped?
The question is inspired by yesterday's (06/09/11) historic announcement by the Swiss National Bank that it would impose a ceiling on the franc of 1.20 against the euro.
I would like to know if there ...
4
votes
2answers
305 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 ...
7
votes
1answer
652 views
How should I estimate the implied volatility skew term when calculating the skew-adjusted delta?
I'm trying to come up with the implied volatility skew adjusted delta for SPY options. I'm working with the following formula:
Skew Adjusted Delta = Black Scholes Delta + Vega * Vol Skew Slope.
I ...
6
votes
1answer
304 views
How do you calculate the implied liquidity of an option?
How does one calculate the implied liquidity of a specific option contract given a set of vanilla puts and calls with various strikes and maturities on a single underlying?
14
votes
3answers
1k views
Why hold options when you can dynamically replicate their payoff?
When holding vanilla options, you can cancel out, theoretically, all risk with dynamic (delta) hedging. Then you earn the "risk free rate of return".
Why would you make such a portfolio when you can ...
6
votes
2answers
558 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 ...
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 ...
8
votes
1answer
827 views
Is QuantLib more trouble than it's worth?
I'm just starting to work with QuantLib and wonder if I'm going down a very wrong path.
I'm working on a site that presents the visitor with a table of streamed real-time options data, including ...
