# Tagged Questions

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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### pricing with implied volatility surface

I am a newbee in Quantive finance. supposing I calibrate a smoothing implied volatility surface with cubic spline now. A minute later I want to price K=100,t=1 option, can I just find the point on ...
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### Pricing options under a specific framework

I have a specific framework in mind and I would like to value options under this framework. I am not sure whether a closed form solution exists or Monte Carlo methods would work. The framework I have ...
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### Does the fact that volatility is not constant imply existence of skew?

I had a question regarding the existence of the volatility skew. I've tried researching it a fair bit and I come across a few different explanations: 1. Market participants like buying downside puts ...
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### What should be the sign of greek letter $\rho$?

I'm reading the book Risk Management and Shareholders Value in Banking by Resti & Sironi. I quote a paragraph from the book (Chapter 5, appendix): The derivative of an option’s value with ...
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### Turnbull & Wakeman Asian - not Edgeworth?

My understanding is that Turnbull & Wakeman derived an approximation formula for continous arithmetic Asian option using Edgeworth series by matching the first two moments. However, in the book ...
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### Delta Volatility Surface Usage to value the option

I always find myself in the unknown charted territory when it comes to non-Linear Instruments. I come across the scenario, How to value the option using Delta Vol surface? Example I have CME traded ...
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### VaR calculation methods of options

I am a little bit confused about VaR in Options and I need a clarification for. I collected the following formulas, can you suggest what is the best formula and explain me why, please?
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### Is it possible to detect a belief that a security will peak and then decline by analyzing American options pricing?

Please forgive me if this is a dumb question. I know only the basics of options and their valuation, and this is a question I've wondered for some time without being able to find a satisfactory answer ...
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### Methods Available for Derivative Pricing in Mathematica? [closed]

I am using Mathematica to price options (built in functions, no need to reinvent the wheel, right?). In the documentation, the Binomial method is used as an example of specifying a non-standard method....
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### Why does it take so many lines of code to price even the simplest of options with QuantLib

I have been looking at QuantLib I am trying to figure out why I need to write so much boilerplate code even when pricing the "simplest" of European Options using the analytical Black-Scholes formula (...
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### Understanding skew of SPX - Why does IV of OTM puts increase with strike?

I've been trying to understand the skew I see when looking at the skew of SPX. Here is a snapshot today from thinkorswim. I understand why IV increases for ITM puts -- namely because there is a ...
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### Max option leverage strike

Since options represent leveraged stock investments, at which strike $K$ does a European option provide maximum leverage? Hereby define leverage $L$ as ratio of Delta/Optionprice: L(K)=\frac{\...
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### Equity protection and butterfly certificates pricing

Certificates issued by famous industry names are usually made up by a combination of a fixed income instrument and some vanilla and exotic options. I am looking for something which explains: how to ...
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### Gil-Palaez Inversion Formula in Black Scholes world

I am trying to calculate numerically the price of a plain vanilla call through Fourier Transform, by applying the Gil-Pelaez formula. More precisely, we have that C(K)=S0*Π1-Kexp(-rT)Π2 where Π1=1/2+...
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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 ...
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### Are there academic papers on the 'term structure' of adverse selection for futures and options?

By term structure I mean a non-stationarity in the pattern of intraday adverse selection as a given instruments approaches its expiry. Note that I am interested in the adverse selection on the ...
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### When are ES E-mini future options issued?

Since options lose 2/3 of their time value in the second half of their lifespan, it makes sense to be aware of when an option was issued. What are ways of figuring out when ES futures options have ...
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### American put option and rising interest rate

Will a rise in interest rate always result in a lower price of an American put option?
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I was reading a textbook and came across some surprising stuff in the section about gap options. Let $X$ be a payoff function such that $X=\Big\{\matrix{0 \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ ... 9answers 7k views ### Why Drifts are not in the Black Scholes Formula This question has puzzled me for a while. We all know geometric brownian motions have drifts$\mu$:$dS / S = \mu dt + \sigma dW$and different stocks have different drifts of$\mu$. Why would ... 2answers 82 views ### put call parity for futures options derivation in Hull In Hull, the following derivation of PCP for futures options: What confuses me is that it is stated that the payoff of the long futures is$F_t-F_0$. The footnote states: the analysis assumes that ... 2answers 232 views ### Covariance structure of call option surface Assume the observed call option prices$C(K_i,T_i)$for$i = 1,\dots,N$are disturbed by some unknown measurement noise$\epsilon$. What would an appropriate covariance structure be for$\epsilon$? ... 1answer 60 views ### Immunization: Whats the best way to hedge my short interest rate exposure? What's the best way to hedge a portfolio against a rise in rates? Portfolio: long bonds different maturities. a) parallel shift b) convex shift (short and long term rise more than mid term) How is ... 1answer 148 views ### Numerical Solutions for PIDE I want to solve an exotic options of PIDE by Numerical Methods.I just focus on the integral part of PIDE and want to underestand some tips on numerical solution of how to numerically solve it. Exactly ... 3answers 10k views ### What is a Heat Rate Option? I tried a search with google but I can't find a clear definition of what a Heat Rate Option is. I would appreciate if someone could explain to me what this type of option is. My understanding is ... 2answers 104 views ### Why the value of this portfolio is negative? [closed] Let's assume I buy 1 call with strike 100 and 1 call with strike 120 I sell 2 calls with strike 110 (with same expiration) I wonder why value of this portfolio is negative at$t=0$? 1answer 346 views ### Backtesting on historical option data I have downloaded some daily historical option data for a timespan of 10 years and want to perform trading backtests with them. Data are European index options, on ODAX. My question is about realistic ... 0answers 65 views ### How big is the options market? I am looking to write an intro to a document describing option pricing. Therefore it would be lovely to motivate it by how large the market is, but I cannot find any good reference. Where can I find ... 6answers 1k views ### Do binary options make any sense? Reading from "www.nadex.com" - the copy reads "Binaries are similar to traditional options but with one key difference: their final settlement value will be 0 or 100. This means your maximum risk and ... 0answers 74 views ### Discrete Hedging of Options Assume that a stock$S_t$follows simple geometric Brownian motion. Let's say we sold option whose payoff is$f(S_T)$. Now, we are only allowed to trade 2 times in the interval [0,T]. What kind of ... 1answer 1k views ### Can American options with no dividends and zero risk-free rate be treated as European? Let's say you've got American options on a future of a stock index. There are no dividends, and no risk-free rate either (assume$r=0$). Can these options then be treated as European from the ... 1answer 48 views ### In this scenario could gamma be higher for OTM options? Let's say there is a$1 stock, with say 1 day to expiration. The 1.5 strike call, is probably a 0 delta at this point; however, a 1 point increase would mean the stock would be at trading at 2 dollars;...
I want to calculate the VaR of two correlated option positions, and I know the correlation between stock price returns. I want to separately calculate $Var_1$,$Var_2$ for option 1 and 2, and then use \$...