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
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 ...
3
votes
2answers
122 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 ...
3
votes
1answer
386 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
82 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
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 ...
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 ...
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 ...
3
votes
1answer
191 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
326 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
147 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
167 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
1answer
104 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
81 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
306 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
760 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
110 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
129 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
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 ...
3
votes
0answers
164 views
What is the longest number of consecutive days that options implied volatility has stayed “extremely high” for any particular underlying?
Curious as to whether or not there is any sort of all time record. Any index, future, or stock will do. Volatility must be well above the average 1 year volatility for all periods.
2
votes
5answers
636 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
4answers
374 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
259 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
298 views
Why is short term implied volatility typically higher?
Why do short term implieds move more than long term?
2
votes
2answers
177 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
536 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
1answer
69 views
Question on OptionMetrics: when are adjustments for discrete dividends needed?
Bakshi et. al. (1997) analyzes the empirical performance of some alternative option pricing models. I am interested to do this as well - hence applying different models - but I am unsure how to handle ...
2
votes
2answers
109 views
Hedging credit risk using Put equity options
I am looking for some paper or similar which deal with this topic: hedging bankruptcy on firm's debt using Put options written on that firm's equity price.
This should be based on the assumption that ...
2
votes
1answer
152 views
Calculating the probability of a price change using an options pricing formula
I don't know if I'm doing this right and I'd greatly appreciate help.
I'm trying to use an option pricing formula to backout the likelihood of the Euro dropping below $1.27, even for a minute, at any ...
2
votes
1answer
184 views
Can a long put trade be profitable through Vega even if the underlying moves upwards?
Generally speaking, I know when implied vol increases, option prices increase for calls.
However, does the same occur for puts?
If I am expecting implied volatility to increase for an option on an ...
2
votes
1answer
140 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 ...
2
votes
1answer
83 views
Hedging differences between equity and index options?
Suppose we hedge an index option using futures on that index. How would the hedging strategy be different if the underlying could be traded directly (from a risk point of view)?
2
votes
1answer
100 views
OTC Equity Options' Dynamics
This only applies to options that do not have marketable equivalents since margin can be marked to them.
I've never been able to find this on my goog.
How is margin typically calculated for OTC ...
2
votes
2answers
307 views
How to calculate Vomma of Black Scholes model
This source (PDF) gives the closed-form for vomma (or volga, i.e. the second derivative of price w.r.t. volatility) of the Black Scholes option pricing model as:
...
2
votes
1answer
144 views
Is there any evidence that an option delta approximates ITM expiry probability?
Several sources (online and offline) that discuss the delta of a listed vanilla option, state that its delta is a (guesstimate?) of the probability of said option expiring ITM (in the BSM framework).
...
2
votes
2answers
314 views
Why don't options traders use charts? Or do they?
Retail trading platforms typically offer equity charts but only instantaneous quotes on options. It seems like even a few minutes of historical data would be useful when entering an order. Are charts ...
2
votes
3answers
272 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 ...
2
votes
2answers
475 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 == ...
2
votes
1answer
374 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 $C$ ...
2
votes
1answer
73 views
Implied dividend estimation
I am looking at two different ways of estimating the expected / implied dividends from market data.
1. Dividend futures
I know that this asset class is not very liquid and might not be ...
2
votes
2answers
101 views
How to synchronize put and call option-data?
I recently retrieved a large amount of European option data, for call and put prices, from OptionMetrics. Doing so for the same time period I get a file consisting of
62558 rows of call prices & ...
2
votes
1answer
129 views
How to calculate implied volatility and greeks in Bull Put Spread option strategy?
Ok, obviously I am buying lower strike put and selling higher strike put. What is the recommended volatility and greeks to consider in my trade?
Volatility:
Average volatility between both legs?
...
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 ...
2
votes
0answers
85 views
Option symbol conversion [closed]
Maybe more of a programming question,
Is there a Ruby gem to facilitate conversion of an option symbol notation from one form to another?
For example, one source provides TZA1220J18
but an API for ...
2
votes
0answers
64 views
Any thoughts on how Warren Buffet's B of A warrants might be “marked-to-market” by either counterparty?
It's not too long since Berkshire Hathaway got its 10-year warrants in Bank of America alongside its \$5 billion purchase of preferred stock. At the time I saw some discussion about the value of ...
2
votes
0answers
90 views
How to find the upper bound of a digital option given some market data?
Given the price of a call equals to 5 with Strike 100, please find the upper bound (sup) of the digital option with strike 105.
I am not sure about the solution, but I write the condition like this,
...
2
votes
0answers
107 views
What is the highest frequency greek for options on futures on bonds?
I'm considering exchange traded options of futures on bonds. Options on bond futures are usually American, thus the Black model is out of question. Which is the most imporatant Greek with respect to ...
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.)?
...
2
votes
0answers
271 views
Can you implement a condor options trading strategy in a spreadsheet? [closed]
Can you implement a condor options trading strategy in a spreadsheet?
Could you give an example?
1
vote
3answers
1k views
Why do some people claim the delta of an ATM call option is 0.5?
I am looking for a mathematical proof in terms of differentiating the BS equation to calculate Delta and then prove it that ATM delta is equal to 0.5.
I have seen many books quoting delta of ATM call ...
1
vote
2answers
457 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 ...
