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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4
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2answers
843 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
3answers
214 views

self-consistent parametric form for equity implied volatility

I recall reading a paper, but can't remember where I found it. In short, there was a parametric form for volatility smile/skew that fit both index and single stock vol slices and had intuitive ...
4
votes
1answer
284 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
723 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
402 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
3k 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
618 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
464 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 ...
4
votes
0answers
75 views

Risk neutral measure in exponential levy model

Is there a method of finding a risk-neutral measure for assets driven by the levy process? I understand there is the esscher transform but I think it tends to transform the processes into ...
3
votes
3answers
644 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
2answers
838 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
5answers
4k 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
114 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 ...
3
votes
1answer
138 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
87 views

Effect of interest rate on options prices

This might be another basic derivatives question. When interest rate rises, stock prices generally fall. Assuming an option's underlying is a stock, this should lower the option's price as well. ...
3
votes
2answers
139 views

Time-zero price of two specific contingent claims

I am unsure how to start with the following problem. I have two contingent claims where contingent claim (1) pays $\int_0^T S_u du$ and contingent claim (2) pays $(\log S_T)^2$ at time $T$ Now I ...
3
votes
1answer
1k views

Seagull option strategy - clear example

It looks like the subject of seagull option strategy is not as clearly explained as for other strategies (butterly, bull,bear spread). Thus, can someone provide a clear example of what you buy and ...
3
votes
1answer
203 views

options pricing using vwap

This is a question about why options prices do not take volume into account. The popular option valuation formula "black-scholes" certainly does not account for this and I don't suggest that it does. ...
3
votes
3answers
326 views

Basic question about Black Scholes derivation

In the derivation of the Black Scholes equation, the value of the portfolio at time $t$ is given by $$P_t = -D_t + \frac{{\partial D_t}}{{\partial S_t}}S_t $$ where $P_t$ is the value of the ...
3
votes
1answer
548 views

Science behind options pricing into Earnings event

I am wondering about studies regarding the uncanny options pricing into public company's earnings reports. The phenomenon being that the price of a straddle before earnings costs near exactly the ...
3
votes
1answer
119 views

Do Bond Put Dates always fall on Coupon Dates (for non-zero coupon bonds). Calculation rules for Coupon Dates

This may not be the most appropriate SE site to ask this question, but I can't seem to find a better place to ask, so here goes: Do Puttable Bonds' put dates always fall on Coupon Dates? When they ...
3
votes
1answer
210 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 ...
3
votes
1answer
276 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 ...
3
votes
1answer
208 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 ...
3
votes
1answer
254 views

European turbo warrants

Totally new to the world of quant finance, so perhaps this is an odd question... Does there exist an American equivalent to the German style "knock out zertifkate"? (The name might be slightly ...
3
votes
2answers
380 views

Hedgefund-like behavior for covered call selling account?

I make money selling covered calls on FX spot options, and some of my friends want to buy in to this without having to trade their own accounts. One method is for each of them to get an account, ...
3
votes
1answer
129 views

Different Exercise Style Options on Same Underlying

Some equities on European markets have options traded in two different exercise styles: American and European. Examples: ABB and ABB (european) on Eurex Banco Santander on MEFF Consider ...
3
votes
1answer
189 views

how to define liquidity in equity, index, and etf options

i've heard several ways to put a metric on liquidity of options.. obviously liquidity isn't a constant.. things like the Bid/Asks spread, liquidity of the underlying.. Trying to find a way to ...
3
votes
1answer
246 views

Choice of epsilon for numerical calculation of vega in binomial option pricing model

I have a binomial option-pricing model (I don't think the details of how its implemented are relevant). However, when I go to calculate vega, I am essentially running the model a second time with new ...
3
votes
1answer
174 views

Creating a doubling and halving position

I want to create a position that either multiplies with $1+u$ (outcome $U$) or $1-d$ (outcome $D$). The probability of $U$ is denoted by $P(U) = \pi$. The initial value of the position is $V_0$. Given ...
3
votes
2answers
719 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 == ...
3
votes
1answer
211 views

what's the relationship between forecasted stock volatility and implied volatility?(option)

what's the relationship between forecasted stock volatility and implied volatility? I know that implied volatility is the volatility calculated by BS formula, is there any relationship between implied ...
3
votes
1answer
139 views

Value options when the currency’s risk free rate is negative?

How would you handle a negative interest rate in index/equity options valuation? An example would be negative rates for short term maturities for Swiss Frank (CHF).
3
votes
2answers
600 views

Equity option portfolio greeks with underlying

I'm curious about how to construct the five basic greeks for an equity option portfolio when there are shares of the underlying in the portfolio. For example, a portfolio of 100 call options and 100 ...
3
votes
2answers
893 views

Pair Trading Index Options

Suppose the trade is between Index Options of two Indices X and Y which are quite similar (but not exactly). So for the equivalent strikes, one can quote option on Index X and cover in Index Y. But ...
3
votes
0answers
117 views

On the interface between Quant finance and actuarial-science/insurance-math

Actuaries (at least in Europe) are frequently severily lacking in quant finance topics. At best they are familiar with B&S model. People going into quant finane or striving to become a quant on ...
3
votes
0answers
87 views

Estimating risk aversion (power or exponential utility) from options prices

I came across this literature and it seems like there are a number of ways people do this. You can do it for an option on any underlying as long as you can create the risk-neutral p.d.f. If you agree ...
3
votes
0answers
123 views

How to price an option with two volatilities?

Imagine you have two volatilities, the second which is "activated" when the stock crosses a barrier called $p_b$. The present price is $p_1$. ($p_b>p_1$). This can be used to price options after a ...
3
votes
0answers
129 views

Arbitrage free price of a derivative when the price is collected over the lifetime of the derivative

Let $X_t$ be an american style financial derivative with random exercise time $T$ where $t$ and $T$ belongs to some finite set $A$. Buying this derivative requires the buyer to pay $p_t$ up to time ...
3
votes
0answers
160 views

How companies choose earnings release dates, & effect on Implied Volatility

A company's earnings release date significantly affects weekly or monthly option prices/implied volatility. For companies that typically release earnings on the cusp of monthly options expiration, ...
3
votes
0answers
93 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 ...
2
votes
5answers
790 views

Do binary options make any sense?

Reading from "www.nadex.com" - the copy reads "Binaries are similar to traditional options but with one key difference: their final settlement value will be 0 or 100. This means your maximum risk and ...
2
votes
2answers
2k views

How to Delta Hedge with Futures?

The theory of delta hedging a short position in an option is based on trades in the stock and cash, i.e. I get the option premium and take positions in the stock and cash. In the classical ...
2
votes
5answers
583 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 ...
2
votes
2answers
795 views

Theta's effect for OTM options

How does $\Theta$ change for deep out-of-the money options? Looking at the below graph, it seems the time decay is highest for ATM options and increases rapidly as we approach maturity of the option. ...
2
votes
4answers
1k views

Why is short term implied volatility typically higher?

Why do short term implieds move more than long term?
2
votes
2answers
126 views

How do I calculate probability distribution of stock prices given option prices?

I'd like to calculate a probability distribution for prices given the option prices for that stock? Any ideas how to do this? My desire is to do this daily and then see how the price PD changes over ...
2
votes
2answers
1k views

Why FX Vanilla Options are quoted in volatility

I've been curious why vanilla options are quoted (and traded) in terms of volatility. Considering that every financial institution has its own options pricing model, volatility as an input would cause ...
2
votes
2answers
120 views

Options with a stochastic strike

Do options where the strike itself is a stochastic process exist? If they do - what are the motivations for such a product and where is it used ? Example: Call-Option with stochastic strike: ...
2
votes
3answers
158 views

Is it wrong to use 'real world' probabilities for option valuation?

Is it wrong to use 'real world' probabilities for option valuation, even when the market is not liquid enough to delta hedge the option? My instinct is that it is wrong, because the time value of ...