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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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 ...
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5answers
642 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
961 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. ...
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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
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2answers
189 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
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2answers
273 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
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2answers
168 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
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1answer
78 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 ...
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2answers
144 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
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2answers
393 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
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2answers
811 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
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1answer
114 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
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3answers
225 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 ...
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2answers
111 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
votes
1answer
182 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 ...
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3answers
155 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
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1answer
212 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
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2answers
134 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 ...
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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 ...
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2answers
168 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
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2answers
272 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
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1answer
337 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
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1answer
243 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
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1answer
196 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
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2answers
257 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
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1answer
92 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
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1answer
127 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
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3answers
188 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 ...
2
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1answer
143 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
355 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
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1answer
120 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
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1answer
138 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
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2answers
761 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
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1answer
339 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). ...
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2answers
426 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
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1answer
608 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
2answers
115 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
102 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 ...
2
votes
1answer
464 views

IB API quotes and speed

The title says it all. I trade futures options exclusively and wanted to see if anyone had insight into the quote speedsrobustness coming into the API. I'm using the Excel DDE right now just building ...
2
votes
1answer
456 views

GARCH(1,1) prediction in R - Basic Questions

Background to question: Hi, I was trying to fit a GARCH(1,1) model to the variance of log returns of a series, and ARMA(0,0) for the mean. I was using the fGarch package to do this. The aim of the ...
2
votes
1answer
402 views

Monte Carlo Options Probability Calculation

I have a fairly simple problem for an application I am writing currently. How do you calculate the options probability of being in the money or touching a certain strike price. I know there are at ...
2
votes
2answers
175 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
600 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
202 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
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0answers
94 views

What equation will convert implied yield volatility to implied price volatility?

I am trying to figure out how to turn implied yield volatility of a short-term interest rate into implied price volatility. Is there an equation to do this? I have come across the equation for a ...
2
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0answers
49 views

What is the main reasons to use Miltersen & Schartz (1998) model for commodity futures options

versus a standard Generalised Black and Scholes model (if there are any?) I have read the paper but I am not to sure about its practical implications as would people with more experience using this ...
2
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0answers
59 views

At-the-money Call Spread approximation

In a trading manual I got during a course, the value of the ATM Call-Spread is approximated by $CS_{ATM}=\frac{1}{2}StrD+(F-m)\times\Delta CS$ The lecturer skipped the part where he derived this ...
2
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0answers
45 views

Forecasting amount of slippage in executing option spreads

Is there a good quantitative model to estimate how much slippage is required to execute a particular option spread trade? For example, let's say you want to execute an Iron Condor. Given X, Y, Z ...
2
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0answers
103 views

Does Bakshi, Kapadia and Madan (2003) VIX building approach underestimate volatility?

From a paper that shortly addresses an alternative approach to VIX-like index building: To test this approach, I've built a fake book of B&S options with constant volatility equal to ...
2
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0answers
39 views

How to interpret CME's specification regarding grains options expirations?

Looking at the contract specifications for Soybean Meal and Soybean Oil (same for Corn, Wheat, and other major stuff I checked) serial options on CME I see the following expiration rule: the last ...