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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105 views

American vs European Options on equity index options

I have a question regarding the usage of European vs American Options. According to Professional Risk Mgr Handbook 2010, American-style options are used mostly on equities whereas European-style ...
2
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1answer
74 views

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?
2
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1answer
97 views

Boundary conditions of PDE from SV model with stochastic interest rate

The PDE for the American put option price $P(S,\sigma ,r,t)$ is \begin{align*} 0 =& P_t+P_SS(r-\delta)+P_\sigma a(\sigma)+P_r\alpha (r,t) \\ +& \frac{1}{2}P_{SS}S^2\sigma ^2 + ...
2
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1answer
78 views

Options on Volatility Control Index

I have two question. Does an option on volatility control index exist? If I google it, it seems like there is such an option, but I can't find the option on any of exchanges. So this is my first ...
2
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1answer
124 views

Using FX ATM/RR/BF Volatility to Estimate Smile

Suppose $S$ is some FX rate, EUR/USD say, and $\sigma_{S}(K,T)$ is the implied volatility for some option written on $S$, sourced from the surface $\sigma_{S}(\cdot,\cdot)$ (alternatively, consider ...
2
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1answer
64 views

Black Scholes Model and Dividends

My question can be summarised as such: Consider a portfolio. Say it has a price $\Pi = x$. Portfolio consists of a stock and a sequence of call options underlying on the stock. It has been announced ...
2
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1answer
57 views

Solving a Non-Linear PDE using a Finite Difference Scheme

I have the following non-linear PDE and I have no idea how to go about solving it using a finite difference scheme in Python. Can someone get me started and/or point me to an algorithm for doing this? ...
2
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2answers
240 views

How to break down an FX option P&L?

I am comparing the mark-to-market (MtM) valuations of two risk systems, with respect to FX Options. My question is can I quantify the difference in MtM given the following: System1 AUD/JPY, MTM = ...
2
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2answers
199 views

How to compute the VaR for European Call, using the delta-normal method?

I have a European call option with current stock price $S_0$, strike $K$, risk-free rate $r$, volatility $\sigma$, and time to maturity $T$ years. I assume that the stock price at time $t$, which is ...
2
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1answer
74 views

Binary option expression

Given r=0, σ(K)=const Binary=lim┬(ε→0)⁡〖((C(K,σ(K))-C(K+ε,σ(K+ε))))/ε〗 What is the analytical expression for the binary option value? σ(K)=const Therefore, Binary=lim┬(ε→0)⁡〖((C(K)-C(K+ε)))/ε〗 ...
2
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1answer
242 views

Does anyone have a C# implementation of the Barone Adesi Whaley options pricing model?

Thanks. Can't seem to find it through google. Worst case, if you can provide me the code in Java or C++ I can convert it to C#.
2
votes
1answer
112 views

How would you price this kind of derivative?

I am somewhat familiar with options but am wondering how to price calls/puts on this one: European exercise "Jumps" in underlying may occur Takes physical delivery upon exercise (is this even ...
2
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2answers
288 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
91 views

Will pricing a Bermudan option default to a value of a European option?

I have a call option with 2 expiry in two years. For the first 9 months I cannot excercise the option. After that the I can exercise at any time. I am pricing this option using a binomial tree using ...
2
votes
1answer
643 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
642 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
575 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
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2answers
214 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
931 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
248 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
votes
0answers
74 views

Simulation of Heston process

I am currently working on implementing Heston model in matlab for option pricing (in this case I am trying to price a European call) and I wanted to compare the results I obtain from using the exact ...
2
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1answer
34 views

Forced to exercise gap options

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 \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ ...
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0answers
33 views

replicating strategy three step binomial

I am having some trouble setting up a replicating strategy for a call option with a three step binomial model (discrete). I have no trouble doing this in a two step binomial model by backward ...
2
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0answers
85 views

Modeling market sentiment and pricing options by volume, open interest

Are there any empirically-proven methods/formulas for weighting IV surfaces, pricing a discount/premium in an option, and/or adjusting any of the 1st- or 2nd-order Greeks for the magnitude (volume or ...
2
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2answers
113 views

Calculating time value of an option

Can someone provide me with a robust way of calculating the future time value of an option or point in the direction? I have been reading a lot about the factors that affect it and about betas and ...
2
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0answers
76 views

Volatility Surface Constituents, do's and dont's

Recently I have been working a lot with implied volatility and volatility surfaces. The basic idea is easy to follow: 1) Gather market prices of options at different (Strike,Expiry) 2) Calculate ...
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1answer
91 views

Price an option whose strike price is always lower than the future price of the security

Suppose it is known that the price of a certain security after one period will be one of the $m$ values $s_1,\ldots,s_m$. What should be the cost of an option to purchase the security at time $1$ for ...
2
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0answers
199 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
54 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
80 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
147 views

Zakamouline Optimal Hedging of Options with Transaction Costs

I've read that the Zakamouline method suggests the best optimal hedging of options when taking transaction costs into account. I've read the article but am having difficulty understanding it well ...
2
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0answers
60 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
54 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 ...
2
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0answers
126 views

Pre-Trade Slippage Costs For Option Spread Execution

Is there a quant model that can help estimate how much slippage one would have to give up in order to get an "option spread" (vertical, butterflies, etc.) order executed? What factors should one look ...
2
votes
0answers
98 views

Option symbol conversion [closed]

Maybe more of a programming question, Is there a Ruby gem to facilitate conversion of an option symbol notation from one form to another? For example, one source provides TZA1220J18 but an API for ...
2
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0answers
79 views

Any thoughts on how Warren Buffet's B of A warrants might be “marked-to-market” by either counterparty?

It's not too long since Berkshire Hathaway got its 10-year warrants in Bank of America alongside its \$5 billion purchase of preferred stock. At the time I saw some discussion about the value of ...
2
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0answers
135 views

How to find the upper bound of a digital option given some market data?

Given the price of a call equals to 5 with Strike 100, please find the upper bound (sup) of the digital option with strike 105. I am not sure about the solution, but I write the condition like this, ...
2
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0answers
161 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 ...
2
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0answers
204 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.)? ...
2
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0answers
293 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?
1
vote
3answers
936 views

Understanding the concept of Martingale pricing

I am a bit confused about how to formulate a problem where I have to price an option on a stock. Many papers say that stock prices are best modeled using a geometric Brownian motion (GBM), and I ...
1
vote
2answers
191 views

Option arbitrage with dividends?

If a stock pays a discrete dividend, the stock price falls by the amount of the dividend. There is no arbitrage opportunity from this predictable jump, because the investors receive the same amount of ...
1
vote
3answers
182 views

What is the name of this product?

Consider the payoff =$S_T1_{S_T>K}$ where $S_T$ is the asset price at maturity. What is this type derivative called? and is it a liquid option?
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1answer
219 views

Why is the VIX computed that way?

The VIX as a clear definition as defined in this paper I am interested to know why they came up with this formula. I smell some reasonably complicated explanation here so any pointer to a paper ...
1
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2answers
117 views

Estimate simple option price without a calculator

I have been to two different interviews for jobs related to option trading, and both time I have been asked a question, which is pretty basic, and still I could not answer it. If you have an European ...
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1answer
126 views

Mysterious disappearance of options from historical datasets

I am in the process of analyzing historical options data, and I keep finding options that mysteriously disappear before they are due to expire. For example: For the QQQ $69 Put, ...
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1answer
462 views

How to explain the path dependency in binomial tree model to price options?

I'm new to quantitative finance, so I'm confused with the so-called path dependency in binomial tree model. Originally I thought the path dependency exists because in binomial tree model, we will ...
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2answers
48 views

Is the Binomial Tree Model not self-financing?

Consider a 2-period binomial tree where the derivative price is $f$ and the stock price is $S$. Also, let the bond be deterministic with continuous growth rate $r$ and initial value $B_0$. binomial ...
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2answers
142 views

Intuitive Reasoning for Using Risk-Neutral Measure

Although we thoroughly covered risk-neutral pricing in university I never fully understood it in the context of continuous-time processes. But first of all, lets consider a discrete time example: ...
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2answers
142 views

How market making in Index options is done?

I have been thinking about this one for last couple of days. With options on share we hedge on cash and the underlying equity as per Black-Scholes formulation. But I am confused on Index options. ...