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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285 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
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1answer
324 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
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2answers
407 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
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2answers
161 views

How to exploit calendar arbitrage?

Say we are looking at European Call options in a toy environment with zero deterministic intereset rates, a stock paying no dividends, no repo rates etc. Let C(T,K) be the price of a call with expiry ...
3
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1answer
113 views

Literature on Empirical Option Pricing

When I started combing through the literature I was astonished about how little the option pricing models are tested against market data and benchmarks are limited. The main barrier is of course ...
3
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1answer
1k views

Drawbacks of Black-Scholes option pricing model

Will highly appreciate if anybody can provide logical financial proof why the Black-Scholes option pricing model overestimates the value for long-term options as described in this paper "Warren ...
3
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1answer
182 views

How to 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 ...
3
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1answer
144 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 ...
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1answer
252 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 ...
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1answer
393 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
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1answer
180 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 ...
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2answers
940 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 == ...
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1answer
278 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 ...
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1answer
161 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).
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2answers
888 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
937 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 ...
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0answers
88 views

How do I calculate the probability of a stock being above or below a value using the Heston model?

How can I use the Heston Model to calculate the probability of a stock being above or below a certain value on a given date in the future?
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0answers
124 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 ...
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0answers
88 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, ...
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0answers
105 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 ...
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0answers
138 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 ...
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0answers
187 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.
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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 ...
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2answers
144 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 ...
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4answers
3k views

Why is short term implied volatility typically higher?

Why do short term implieds move more than long term?
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votes
2answers
2k 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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2answers
128 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 ...
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2answers
740 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 ...
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2answers
290 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: ...
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1answer
81 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
123 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 ...
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2answers
171 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: ...
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votes
2answers
1k views

Delta Neutral / Gamma Neutral Positions

I've been trying to find out more about options positions which are both delta neutral and gamma neutral--created with some kind of calendar spread. Supposedly, such a trade will be perfectly hedged ...
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2answers
515 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
1k 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
126 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
99 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 ...
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3answers
231 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
203 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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votes
3answers
185 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
345 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
156 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
200 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
302 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
378 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
214 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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1answer
129 views

Some questions about implied volatilities and how to generate theoretical prices when market prices are not available

I am building a little Excel file that take some option prices in input and plots the volatility smile/surface. I have a script that reads market prices from the option chain for 3 different ...
2
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1answer
108 views

Effect of time to maturity on european put option

Let $C(K,T,S_0)$ denote the price of an European call option with strike K and maturity T on underlying price $S_0$. Assume interest rate $r>0$. Then of course $C(K,T,S_0) \geq 0$ and $C(K,T,S_0) ...
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1answer
88 views

Asymptotic behavior of theta of vanilla call option

It is well known that the theta of call option is always negative. Also, the theta of (at the money call option) goes to infinity as the time approaches to the maturity. On the other hands, (ITM and ...
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1answer
57 views

Exercise on American call option and dividends

Consider an americal Call option on an underlying paying dividends. Then it is often argued that it is only optimal to exercise right before the dividend is paid out, otherwise one will not exercise. ...