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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105 views

What is the most convenient data structure for backtesting a model of futures options prices?

I have an empirical model for the dynamics of futures prices in a particular market that I have implemented using a long series of the front five contracts. (I account for the roll in my model.) I ...
3
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0answers
82 views

Pre- Versus post-2008 Crisis Rates Modeling

Modeling for interest rate derivatives (such as bermudan swaptions) is said to have undergone significant changes since the crisis. Prior to the crisis, counterparty default risk was often ignored, ...
3
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0answers
98 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
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0answers
137 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
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0answers
133 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
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0answers
170 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
1answer
170 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
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0answers
186 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
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5answers
7k 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 ...
2
votes
2answers
3k 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
729 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
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2answers
1k 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
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4answers
2k views

Why is short term implied volatility typically higher?

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

C# - Using Black Scholes Newton returns NaN occasionally

First caveat: I'm a programmer doing this for a client, and my knowledge of options probably has holes in it. So be a little forgiving here. =) The Issue: When I run Black Scholes Newton against ...
2
votes
2answers
212 views

Why are options called what they are called?

This may be a very obvious question, but can someone tell me where and when the names call and put originated? And similarly, where do the terms American and European option come from? Aside from the ...
2
votes
2answers
470 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
242 views

SVCJ (SVJJ) Duffie et. al Model implementation in Matlab

I'm attempting to implement aforementioned SVCJ model by Duffie et al in MATLAB. so far without success. It's supposed to price vanilla (european) calls . parameters provided, the expected price is: ...
2
votes
1answer
80 views

How do I prove that $\lim_{K\searrow0}\frac{P(K,T)}{K} = \mathbb P(S_T=0)$?

I am trying to prove that $$\lim_{K\searrow0}\frac{P(K,T)}{K} = \mathbb P(S_T=0)$$ where $P(K,T)$ denotes the put option price with maturity $T$ and strike $K$ for some stock $S$. Assuming interest ...
2
votes
2answers
120 views

When can a derivative be considered to be path dependant?

The typical example of path dependant derivatives are knock-ins and knock-outs. At the same time vanilla American options can also be considered to be highly path dependant. Does a more or less ...
2
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2answers
155 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
2answers
476 views

Index arbitrage with Options when not all underlyings have options listed?

One arbitrage strategy involves looking at the price of the Index Futures price compared with the prices of the options contracts for the underlyings. My question is, can this arbitrage strategy ...
2
votes
2answers
944 views

backtesting options strategies in R

I would like to backtest an options strategy in R. I require the ability to delta hedge and rebalance to options in the portfolio at different frequencies (daily, monthly,etc.) What packages are the ...
2
votes
1answer
121 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
1answer
94 views

How literature come up with risk-neutrality problem, considering that market is not really risk-neutral?

I am searching on real-option pricing deficiencies to encounter risk-neutrality. As we know risk-neutrality assumption, is not hold in real situations. The problem is that I could not classified ...
2
votes
1answer
87 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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3answers
230 views

What noun is used to describe whether an option is call or put?

I'm not sure if this should be asked elsewhere, but it seems like a good place as any. Options have a strike price, they have an underlying instrument, and they have an expiry. They are also either ...
2
votes
1answer
196 views

Call option on a Mutual Fund

I am trying to price a call option on a mutual fund. Given the lack of market implied data, I am going to estimate the fund´s expected volatility using as a reference its historical volatility ...
2
votes
3answers
172 views

Why are short expiries associated with more pronounced volatility skews?

I've noticed that for a given strike price, the shorter expiration dates of options have more pronounced volatilities why is that?
2
votes
1answer
280 views

How to replicate this option?

I have a question I am not sure how to approach: Suppose interest rates is 50%, a stock worth \$1 today can be worth \$2, \$1, \$0.5 next year. If the option that pays \$1 only when S = \$2 is ...
2
votes
2answers
165 views

Lower bound of ITM Calls when computing Implied Volatility

Assuming the Black Scholes model and pricing formula of a European call option. Then, if the call is ITM, i.e. if $ln(\frac{S}{K})>0$, the $d_1$-term will go towards infinity as $\sigma$ goes to ...
2
votes
2answers
153 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 ...
2
votes
2answers
186 views

What is most reasonable approach to determine side of a multi-leg options order?

Say, 4-legged multi-leg options order with below leg ...
2
votes
2answers
287 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
358 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
205 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
2answers
312 views

Black Scholes vs Binomial Model

I'm trying to confirm my understanding of the 2 models. It is my understanding that the black-scholes is a special case of a binomial model with infinite steps. Does this mean that if I were to start ...
2
votes
1answer
99 views

QuantLibXL - Optionlet bootstrapping failure

I am trying to bootstrap the Optionlet volatility surface from a Cap/Floor volatility surface using QuantLibXL. To be specific, the data is from ICAP: ...
2
votes
1answer
163 views

Implied probability density (Question 2 - Applications and Interpretation)

Using the second derivative of the Call-Option-Price one can try to recover the pricing density. Formally: Assuming a constant interst rate $r$ and also not making any assumptions on the model ...
2
votes
1answer
153 views

Synthesize a futures spread option

Is it possible to synthesize a futures spread option using only the options on the spread's underlyings? If so, how? If not, is there another way? As an example, please show me how to synthesize ...
2
votes
1answer
427 views

Aprox intraday implied volatility using intraday option prices and EOD greeks

I have two options datasets: EOD IV and Greeks Tick option and underlying prices I'm looking to calculate IV for each tick. Is there a way to approximate the ticks' IV using last EOD Greeks and ...
2
votes
1answer
126 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
143 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
862 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
372 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
437 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
1answer
671 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
110 views

Does anyone have a C# implementation of the Barone Adesi Whaley options pricing model?

Thanks. Can't seem to find it through google. Worst case, if you can provide me the code in Java or C++ I can convert it to C#.
2
votes
1answer
100 views

How would you price this kind of derivative?

I am somewhat familiar with options but am wondering how to price calls/puts on this one: European exercise "Jumps" in underlying may occur Takes physical delivery upon exercise (is this even ...
2
votes
2answers
159 views

Why do some stock options have expiration dates for a given month, while others don't?

Take two stocks, WWE and XPO, both traded on NYSE. Today, May 28, 2014, XPO has options expiring August 2014... ...while WWE doesn't: Why is that? From my experience, the missing expiration ...
2
votes
1answer
125 views

Valuation of Cox-Ross-Rubinstein Model

We have a Cox-Ross-Rubinstein model with parameters $u$ ("up"), $d$ ("down") , $r$ (interest rate) and $q$ (equivalent martingale probability) $(q=(1+r-d)(u-d)^{-1})$ . We have a contingent claim with ...