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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7
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1answer
290 views

When pricing options, what precision should I work with?

I'm wondering if there's any point at all in double-precision calculations, or whether it's ok to just do everything in single-precision, seeing how the difference on non-Tesla GPUs for single and ...
4
votes
1answer
629 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 ...
2
votes
0answers
139 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 ...
5
votes
1answer
315 views

What are VIX back-month futures based on?

The VIX calculation is a weighted average of prices for front-month out-the-money options on the S&P index. So for VIX futures, this makes sense for the front month vix futures (being based on a ...
5
votes
2answers
2k views

Implied Volatility from American options (binomial)

I am trying to get the implied volatility from options on commodity futures and I know it's possible to get it from the binomial american options (on an non-dividend paying stock). I believe it is ...
7
votes
2answers
984 views

How to calculate the most realistic historical option prices with additional publicly available parameters

This is a follow up question of this one. My aim is to create the most realistic historical option prices possible with publicly available data. I want to do this for backtesting purposes. The ...
4
votes
2answers
431 views

Does put-call parity hold for a compound option with underlying American option?

Say there is an American put option that expires $N$ months from today. A call-on-put (CoP) option provides the owner the right to buy the American put option in exactly $M < N$ months (but no ...
3
votes
0answers
166 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, ...
5
votes
2answers
945 views

Constructing an approximation of the S&P 500 volatility smile with publicly available data

Besides of the VIX there is another vol datum publicly available for the S&P 500: the SKEW. Do you know a procedure with which one can extrapolate other implied vols of the S&P 500 smile with ...
3
votes
1answer
213 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 ...
5
votes
1answer
425 views

Modified bisection formula for deriving implied volatility for a dividend paying american option

I am trying to work out the formula for calculating the implied volatility of an american option on a stock paying dividends (discrete payments or annualized yield). On page 171 of Haug The ...
3
votes
2answers
777 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 == ...
6
votes
2answers
3k views

What causes the call and put volatility surface to differ?

I currently have a local volatility model that uses the standard Black Scholes assumptions. When calculating the volatility surface, what causes the difference between the call volatility surface, ...
9
votes
1answer
302 views

What drives changes in implied volatility on ETFs/ETNs?

I thought implied volatility, as well as the VIX, primarily increase due to increases in the underlying asset's volatility, as well as the options themselves being bid up because more people were ...
7
votes
4answers
2k views

How to obtain true probabilities from Black-Scholes?

How to obtain true probabilities from Black-Scholes option pricing equation? Suppose, that we know risk adjusted discount rate for the underlying asset (the drift term in the physical measure) and ...
0
votes
1answer
880 views

what is the best way to calculate the probability of an equity option ending in the money?

Given historical implied volatility and all other know variables (stock price, option strike price, option expiration date, dividend rate, interest rate) what is the best way to calculate the ...
1
vote
2answers
652 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 ...
11
votes
3answers
558 views

What benchmark/index to use for backtesting a portfolio of stock options?

What benchmark should I use for backtesting a model for when I should buy an option of a particular stock? For equities, one could say their portfolio outperformed the S&P 500. I would like to ...
12
votes
2answers
665 views

Can you fully hedge an option in the presence of counterparty risk?

The derivation of the Black-Scholes model assumes no counterparty risk. Does the presence of counterparty risk invalidate the argument behind the model? EDIT: The question is about options in ...
6
votes
4answers
2k views

How does an option's time value depend on moneyness?

How does an option's time value (also known as extrinsic or instrumental value) depend on how far it is in the money or out of the money? In other words, how does the time value change as the ...
-7
votes
4answers
1k views

True or False? An option's price will always be greater than or equal to its intrinsic value

Since if the option's price is lower than its intrinsic value (eg. strike price - current stock price for puts), then an arbitrage opportunity arises from buying the option at bargain and then ...
2
votes
5answers
638 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 ...
3
votes
1answer
278 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 ...
5
votes
1answer
508 views

How to apply quasi-Monte Carlo to path-dependent options?

Following up on my recent question on variance reduction in a Cox-Ingersoll-Ross Monte Carlo simulation, I would like to learn more about using a quasi-random sequence, such as Sobol or Niederreiter, ...
3
votes
0answers
96 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 ...
1
vote
2answers
132 views

Buying one company or index against another, is this readily possible with options, with an accurate return (also Alpha Indexes)

There's a relatively new product in the market / on the Nasdaq called Alpha Indexes. It lets one own a company -- e.g. Apple, GE, Google, etc -- as the difference between how that company does (the ...
5
votes
1answer
1k views

How would I value a perpetual bond with an embedded option?

I am trying to work out how to value the following transactions. It should be straight forward, since it breaks down into a series of well known instruments, yet I am not sure how to evaluate it: ...
4
votes
3answers
299 views

Given markets usually fall fast and rise slowly, are there trading mechanisms to take advantage of this?

Per a previous question on this topic -- markets generally fall fast and rise slowly: what options strategies or other strategies can one use to take advantage of this common occurrence?
0
votes
1answer
263 views

Does an option's price “ratio” with the underlying security price?

I'm trying to understand option pricing better. Let's say security ABC is \$40, and a 38 PUT option with 40% implied volatility (and 90 days till expiration) is priced at X. If security ABC then ...
7
votes
2answers
2k views

Are there comprehensive analyses of theta decay in weekly options?

Are there comprehensive analyses of how much theta a weekly options loses in a day, per day? I know what the shape of theta decay looks like, in theory, where the decay towards zero happens more ...
4
votes
1answer
231 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 ...
6
votes
1answer
374 views

How sensitive are vertical spreads to changes in implied volatility?

How sensitive are vertical spreads to changes in volatility / implied volatility in the money, at the money, and out of the money? I'm thinking for 1 point spreads this would be very small / neutral ...
9
votes
2answers
311 views

When is it rational to exercise a bond option early?

Consider american options on interest rate futures such as the 10-year treasury note. When is early exercise optimal?
5
votes
2answers
295 views

What changes to put-call parity are necessary when evaluating american options on non-dividend paying assets?

If an underlying doesn't pay dividends (for our purpose defined as any distribution to the underlying's holder) directly or indirectly (e.g. options on futures) how does put-call parity change from ...
4
votes
4answers
1k views

How to price a calendar spread option?

How do you price calendar spread options, that is, options on the same underlying and the same strike but different times to maturity? Clarification: I'm interested in the pricing of a a CSO ...
1
vote
1answer
345 views

Calculating Theta assuming other variables remain the same

Is there any way to calculate theta at X day in future based solely on knowing 1) Total Current Option Price 2) Days Till Expiration How would this be done? Thank you
6
votes
1answer
444 views

Can options volume have an impact on the price of the underlying asset?

Can options volume affect the underlying asset price indirectly? I know that options buying/selling does not directly affect the price of the underlying asset (rather, the asset price contributes most ...
4
votes
1answer
318 views

Standard Deviations out the money where options will respond to underlying asset price changes

Is there an understood way of determining how far out the money an option can be, before it starts/stops responding to the underlying asset price changes? I usually look at the greeks, gamma, delta, ...
7
votes
2answers
1k views

What does the VIX formula measure and how does it work?

I have read the CBOE's white paper on the VIX and a lot of other things, but I need to honestly say, I don't really get it, or I am missing something important. In semi-layman's terms, is the VIX ...
2
votes
0answers
183 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.)? ...
6
votes
2answers
2k views

How to extrapolate implied volatility for out of the money options?

Estimation of model-free implied volatility is highly dependent upon the extrapolation procedure for non-traded options at extreme out-of-the-money points. Jiang and Tian (2007) propose that the ...
2
votes
1answer
201 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 ...
11
votes
2answers
629 views

Can you replicate an option on an arbitrary basket of stocks?

Since a market index is nothing more than a basket of stocks, you can create your own index by putting together stocks of your choice. The only difference is that you can trade options on major ...
5
votes
2answers
296 views

How can one determine approximately what percentage of options trades are buyer-initiated vs. seller-initiated?

How can one determine approximately what percentage of options trades are buyer-initiated vs. seller-initiated? What measures of order flow are available specifically for options, preferably for ...
7
votes
1answer
164 views

How to handle coupon payments when pricing a bond with an embedded option?

I'm using a binomial tree to price a bond that has an embedded call or put option. On every node that has a coupon payment, do you include the coupon payment then max/min out the value, or do you ...
7
votes
2answers
232 views

What do we really mean by put-call ratio and how should it be expressed?

I need to calculate the put-call ratio for an American option. But I'm a complete naïf: I don't know how. I think I'd use the put open interest and the call open interest. I can imagine two ways to ...
15
votes
5answers
3k views

Skew arbitrage: How can you realize the skewness of the underlying?

It's not clear to me how to realize skewness. In other words, how do you implement skew arbitrage? There seems to be no well-known recipe like in volatility arbitrage. Volatility arbitrage (or ...
8
votes
3answers
2k views

How does volatility affect the price of binary options?

In theory, how should volatility affect the price of a binary option? A typical out the money option has more extrinsic value and therefore volatility plays a much more noticeable factor. Now let's ...
1
vote
0answers
284 views

Delta-Omega Hedging [closed]

I am currently trying to understand the in's and out's of options and more specifically hedging. I came across a document that was talking about Delta Hedging which is just making sure the delta of ...
6
votes
2answers
205 views

What is more appropriate: the EMA of the option price or the EMA of the underlying?

I'm progressing, all too slowly, on a site that aims to show real-time numbers for options that are listed on the CBOE. Most of the instantaneous numbers are all set. Now I'm going to pay attention to ...