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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10
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3k views

Is there an all Java options-pricing library (preferably open source) besides jquantlib?

I am looking for an all-java implementation of black scholes, preferably open source. I found jquantlib and quantlib (C++). Any other recommendations? The jquantlib site seems to be down. I'd prefer ...
8
votes
1answer
227 views

How should FX options be priced when a currency is artificially capped?

The question is inspired by yesterday's (06/09/11) historic announcement by the Swiss National Bank that it would impose a ceiling on the franc of 1.20 against the euro. I would like to know if there ...
15
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3answers
2k views

Why hold options when you can dynamically replicate their payoff?

When holding vanilla options, you can cancel out, theoretically, all risk with dynamic (delta) hedging. Then you earn the "risk free rate of return". Why would you make such a portfolio when you can ...
9
votes
3answers
1k views

How to solve for the implied stock lending rate given equity options prices?

When market makers price options on hard-to-borrow equities, they include the cost to borrow the underlying equity that their broker is going to charge them to sell the security short to hedge. I'm ...
6
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2answers
887 views

Can one use options on Treasury futures to hedge a portfolio?

Can one use options on Treasury bond futures to hedge a typical fixed income portfolio? If so, how can one estimate the duration for an option on a Treasury futures contract, and taking this a step ...
5
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2answers
2k views

using quantlib function in my c++ program

I want to include the QuantLib function for option greeks calculations in my own C++ code. My question is: can I just include those functions? I don't want to use the rest of their stuff. I obviously ...
8
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1answer
1k views

Is QuantLib more trouble than it's worth?

I'm just starting to work with QuantLib and wonder if I'm going down a very wrong path. I'm working on a site that presents the visitor with a table of streamed real-time options data, including ...
6
votes
1answer
5k 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 that ...
4
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2answers
386 views

What does put-call parity imply about option premiums?

We know that $$C-P = PV(F_{0,T}-K)$$ When we create a synthetic forward, we buy call and sell a put at the same strike price $K$. When we buy the call why do we assume the premium is positive? When ...
11
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2answers
3k views

How to derive the implied probability distribution from B-S volatilities?

The general problem I have is visualization of the implied distribution of returns of a currency pair. I usually use QQplots for historical returns, so for example versus the normal distribution: ...
2
votes
1answer
607 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 $C$ ...
6
votes
1answer
531 views

How to calculate equivalent futures position?

Let's say I have the following two positions: Buy ATM SPX call, expires in 1 month Sell ATM SPX put, expires in 1 month This creates a synthetic futures position. How do I calculate how many ...
4
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1answer
3k views

How to replicate a digital call option

Call Option S=100 K=100 Payoff=1 (option is not available) How can i replicate this (payoff) with calls and puts with strike prices with multiples of 5$ Thanks for help
11
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3answers
3k views

Papers about backtesting option trading strategies

I am looking for all kinds of research concerning option trading strategies. With that I mean papers that publish results on different option trading strategies properly backtested with real-world ...
5
votes
1answer
172 views

Quantifying Hedging Error Due To Expiration Day Range?

Let's say I have two call option liabilities that I want to statically hedge with a single call option. Liabilities: Liab_Call_1: Strike: 100 Notional: 1000 DaysToExpiration: 20 Liab_Call_2: ...
7
votes
1answer
987 views

How should I estimate the implied volatility skew term when calculating the skew-adjusted delta?

I'm trying to come up with the implied volatility skew adjusted delta for SPY options. I'm working with the following formula: Skew Adjusted Delta = Black Scholes Delta + Vega * Vol Skew Slope. I ...
5
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1answer
219 views

Modeling liquidity effect on option prices

What are practically useful ways of modelling the effect of liquidity on options?
12
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6answers
910 views

Setting the r in put-call parity?

Put-call parity is given by $C + Ke^{-r(T-t)} = P + S$. The variables $C$, $P$ and $S$ are directly observable in the market place. $T-t$ follows by the contract specification. The variable $r$ is ...
8
votes
1answer
438 views

What are important model and assumption-free no-arbitrage conditions in options trading?

In the paper "Why We Have Never Used the Black-Scholes-Merton Option Pricing Formula" (Espen Gaarder Haug, Nassim Nicholas Taleb) a couple of model-free arbitrage conditions are mentioned which limits ...
17
votes
5answers
10k views

What are some useful approximations to the Black-Scholes formula?

Let the Black-Scholes formula be defined as the function $f(S, X, T, r, v)$. I'm curious about functions that are computationally simpler than the Black-Scholes that yields results that approximate ...
4
votes
5answers
820 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 ...
3
votes
1answer
269 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 ...
13
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6answers
1k views

Why are options trades supposed to be delta-neutral?

I'm reading Natenberg's book, and he says that all options trades should be delta neutral. I understand that this prevents small changes in the underlying price from changing the price of the option, ...
6
votes
3answers
345 views

Parameters for pricing option on EDF

Ladies and Gents, Im writing a quick routine to calculate implied vols for options on EUR$ futures with Bloomberg data. My question concerns the part where I have all my inputs and am ready to pass ...
19
votes
6answers
5k views

What type of investor is willing to be short gamma?

As far as I understand, most investors are willing to buy options (puts and calls) in order to limit their exposure to the market in case it moves against them. This is due to the fact that they are ...
3
votes
0answers
183 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.
4
votes
1answer
496 views

Need historical prices of EUREX American and European style options

I am trying to get the historical price data on selected American and European style options at EUREX. I am not familiar with their system. Does any one know whether they have something like yahoo ...
4
votes
2answers
644 views

Heuristics for calculating theoretical probabilities of being ITM at time T for listed options

I'm looking for a heuristic way to calculate the probabilities of being in the money at expiry for non-defined risk options combinations (listed options). I use delta as a proxy for this probability ...
4
votes
2answers
760 views

How to derive appropriate volatility for a binary option (with strike/term) from market data?

I am valuing a binary FX option (european) with a defined strike and term (2Y). I'm using a closed form solution based on Black-Scholes framework. How can I derive the appropriate volatility to use ...
7
votes
4answers
1k views

Methods for pricing options

I'm looking at doing some research drawing comparisons between various methods of approaching option pricing. I'm aware of the Monte Carlo simulation for option pricing, Black-Scholes, and that ...
7
votes
3answers
506 views

How would one price a “credit event binary option”?

CBOE has introduced credit event binary options, kind of as a retail trader's CDS. These binary options are worth $1 if there is a credit event (ie, bankruptcy) before expiration, and $0 if there is ...
9
votes
1answer
944 views

Is there a popular curve fitting formula of options skew vs strike price or vs Delta?

I was trying to build a options trading/optimization system. But it often gets more inaccurate as it scans through the far from ATM options because, you know, options skews. That is because I did ...
3
votes
2answers
390 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, ...
6
votes
1answer
339 views

How do you calculate the implied liquidity of an option?

How does one calculate the implied liquidity of a specific option contract given a set of vanilla puts and calls with various strikes and maturities on a single underlying?
4
votes
1answer
871 views

Simple model for option premium (for covered call simulation)?

Given a historical distribution of weekly prices and price changes for a stock, how can I estimate the the option premium for a nearly at-the-money (ATM) option, say with an expiration date 3 months ...
9
votes
1answer
171 views

Breaking Transactions Down into Derivatives

We were talking about merger arb in a class I had last night, and when we got do deal construction it was mentioned that the different ways can be viewed as different options. For instance a fixed ...
10
votes
1answer
242 views

How do you characterize dividends for equity options?

While many systems like to treat dividends as a continuous yield when pricing equity options, it works quite poorly for short-dated options. In the short run, deterministic dividends are clearly the ...
6
votes
2answers
478 views

What are the major models for energy derivatives, particularly electricity derivatives?

Aside from Black-Scholes with crazy skews, what major models are used for energy derivatives? I'm thinking particularly of electricity derivatives, but I'm also interested in natural gas and other ...
2
votes
0answers
286 views

Can you implement a condor options trading strategy in a spreadsheet? [closed]

Can you implement a condor options trading strategy in a spreadsheet? Could you give an example?
7
votes
2answers
1k views

Is there a technique for using xts or zoo objects with options data (i.e., many entries per date) in R?

I am starting to work with options data from optionmetrics. I use data frames, but it seems like xts or zoo objects are the way to go for features and speed. I can't figure out the best work-around to ...
9
votes
5answers
5k views

What is the implied volatility skew?

I often hear people talking about the skew of the volatility surface, model, etc... but it appears to me that a clear standard definition is not unanimously in place among practitioners. So here is ...
9
votes
1answer
332 views

Appropriate measure of Volatility for economic returns from an asset?

I am doing research on uncertainty analysis and risk assessment for oil field development. For doing economic forecast and valuation I use Real Options theory, which is almost similar to theory used ...
14
votes
2answers
494 views

Who has introduced the term 'vega' and why?

The sensitivity of the option value $V$ to volatility $\sigma$ (a.k.a. vega) is different from the other greeks. It is a derivative with respect to a parameter and not a variable. To quote from Paul ...
6
votes
1answer
449 views

What is the best method to compute project volatility in Real Option Valuation?

There are few methods like Copeland-Antikarov, Herath-Park, Cobb-Charnes etc. to compute project volatility, however these methods compute upward biased volatility. What is the best method I could ...
10
votes
8answers
4k views

Why does implied volatility show an inverse relation with strike price when examining option chains?

When looking at option chains, I often notice that the (broker calculated) implied volatility has an inverse relation to the strike price. This seems true both for calls and puts. As a current ...
25
votes
8answers
2k views

Option pricing before Black-Scholes

According to the Wikipedia article, Contracts similar to options are believed to have been used since ancient times. In London, puts and "refusals" (calls) first became well-known trading ...
13
votes
7answers
5k views

What is the “delta” option quoting convention about?

At my work I often see option prices or vols quoted against deltas rather than against strikes. For example for March 2013 Zinc options I might see 5 quotes available for deltas as follows: ...