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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2answers
401 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 ...
-4
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1answer
56 views

Can not understand options pricing [closed]

As we are seeing here http://www.theoptionsguide.com/strike-price.aspx Relationship between Strike Price & Call Option Price Relationship between Strike Price & Put Option Price I do not ...
0
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1answer
699 views

Negative time value european options

I have a basic question for which I feel like I should have found the answer by googling it, but I didn't get a definitive answer, so here I am: Can the time value for a plain vanilla (European) ...
0
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2answers
178 views

Pricing a call when minimum stock price above strike with certainty

I am editing this question because it was originally unclear, and I didn't get the answers I was hoping for. In my finance book I have the following question T-bills currently yield 5.5 percent. ...
10
votes
2answers
609 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 ...
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0answers
76 views

Cointegration and variance of time series

Given that $X_t , Y_t$ are two cointegrated random processes, what can we say about the relationship between variance of the two increments $var(X_{t+h}-X_t)$ , $var(Y_{t+h}-Y_t)$ for a given ...
1
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2answers
161 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: ...
1
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1answer
288 views

Market data for options

Looking for recommendations on places to get market data for options. I'm looking at NYSE and NASDAQ only. My current solution is my broker, Tradeking. I can request realtime data for 700 option ...
8
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3answers
985 views

On the interface between Quant finance and actuarial-science/insurance-math

Actuaries (at least in Europe) are frequently severily lacking in quant finance topics. At best they are familiar with B&S model. People going into quant finane or striving to become a quant on ...
1
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0answers
100 views

Black Scholes Model Replicating Strategy Delta Hedged Exam Question

A share is currently priced at 640p. A writer of 100,000 units of a one year European put option with an exercise price of 630p has delta-hedged the option with a portfolio which holds cash and is ...
2
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1answer
95 views

Pricing digital options in discrete time

I am stuck in this exercise from my textbook: Consider a one-period market model with $N+1$ assets: a bond, a stock and $N-1$ call options. The prices of the bond are $B_0=1$ and $B_1 = 1+r$, ...
2
votes
0answers
144 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
votes
1answer
64 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? ...
8
votes
4answers
844 views

Replicating portfolio and risk-neutral pricing for interest rate options

For equity options, the pricing of options depends on the existence of a replicating portfolio, so you can price the option as the constituents of that replicating portfolio. However, I am not seeing ...
3
votes
1answer
274 views

The meaning of Ornstein-Uhlenbeck parameters

I am trying to understand theOrnstein-Uhlenbeck process $dX_t = \kappa(\theta-X_t)dt + \sigma dW_t$ my question is what is the meaning of the parameters? and assuming that we know those parameters ...
28
votes
5answers
22k 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 ...
0
votes
1answer
67 views

Good book about replicating portfolios

I want to know if anybody can suggest me a good textbook which explains in detail and in an understandable way how to create replicating portfolios of financial instruments like options "cash or ...
2
votes
2answers
124 views

Braess's paradox in quantitative finance: When optionality leads to lower value…?

One of the standard tenets of quantitative finance is that options should have an intrinsic value because optionality as such (in the sense of having more choices) should bring about value. This ...
0
votes
1answer
742 views

Binomial tree vs trinomial tree in pricing options

Very new to pricing models. Is there a general guideline when to use binomial tree and when trinomial tree is preferred? As far as I know, unlike binomial tree, trinomial tree only gives a range ...
4
votes
2answers
171 views

Time-independent local volatility

Suppose somebody provides us with a surface of European call prices $C(\tau,K)$ where $\tau$ stands for time-to-maturity and $K$ for the strike. By Dupire's results, there is a unique local volatility ...
2
votes
2answers
273 views

Is implied volatility flawed?

Was going through how Implied Volatility is used by option traders and in delta hedging. Correct me if I am wrong, doesn't IV consider a standard deviation of the stock price over say the past 1 year? ...
8
votes
2answers
3k 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 ...
3
votes
2answers
144 views

What is the use of options pricing formulas

This may seem like a dumb question, but if the EMH is generally true, wouldn't options already be correctly priced? Why do we need all these intricate formulas, unless we think the prices are wrong or ...
0
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1answer
72 views

Symbols for options on gold futures

I have a historical data set containing only options on gold futures. If I print out a unique list of option symbols I get: ...
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0answers
47 views

Calculate minimum IV increase to offset theta

How would one calculate the minimum implied volatility increase necessary to offset theta decay? IV is typically a percentage, while theta is a dollar value. In theory I think I could look at what ...
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votes
1answer
133 views

Risk Neutrality Necessary for Dual Delta Calculation?

I have an option chain for a specific expiry date. Then calculate dP/dK numerically for each pair of strikes. My hunch is that this calculation is not risk neutral in the strictest sense of the word ...
4
votes
6answers
4k views

Call vs. Put Option

I have two interrelated questions that have been bothering me for some time. I have read all the stuff online and it still doesn't make sense to me: Let us assume: 0% interest rate (both hedge ...
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0answers
56 views

Hedge volatility decreases

My particular options positions are typically a long delta, and long vega. Decreases in implied volatility, or specifically the VIX, can drastically alter the profitability of my position. Is there a ...
1
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1answer
83 views

binomial option pricing model - problem with risk-neutral probability

I have a little problem: in the binomial option pricing model, the price of a european derivative security $V_{n}$ satisfies: $V_{n}=[1/(1+r)]*[\tilde{p}*optionUp +\tilde{q}*optionDown]$ where: ...
0
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0answers
41 views

Impact of Implied skew variations on future prices

I want to test the relationship between of the oil implied volatility skew and oil future prices. I'm lost regarding the method to test the relationship. I was thinking about a regression but I'm ...
-1
votes
1answer
119 views

In a FX options book, is the sum of P&L equal to the portfolio value?

For a portfolio containing FX options, would the sum of P&L for each option be the portfolio value?
2
votes
2answers
171 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 ...
1
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2answers
60 views

I have some historical options data, and there are duplicates of some options, how to filter them

I have some historical EOD options data for 2013, and there are duplicates listed for same strikes/expirations. I was told that by the provider that this is due to "special one-time cash payout" for ...
0
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2answers
269 views

How to price exotic options using Monte-Carlo?

I am actually trying to solve some exercise problem using Monte-Carlo and C++ for exotic options. Namely, the exotic options are geometric Asian options and discrete barrier option. It is claimed ...
1
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1answer
51 views

Does a call calendar lose its entire value if underlying increases well past the strike?

If I buy a call calendar spread, and the underlying increases, both options are in the money by the expiry of the short call. So both options increase in value, but the short one increases less ...
0
votes
1answer
208 views

Convert a call spread to a butterfly to mitigate risk

I do not have a source for this (apologies), but sometimes, I hear about option traders initiating a vertical spread(short) and then converting that call spread to a butterfly spread to mitigate risk. ...
2
votes
2answers
899 views

Which interest rates to use for options pricing?

I am looking at the historical treasury interest rates and am uncertain which rates would be best to use for options pricing. Should I use 1 month, 6 month, 2 year? See: ...
2
votes
2answers
447 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 ...
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1answer
43 views

How to manage risk on a call calendar when underlying is falling

Let us say I bough a call calendar spread. Now, at expiry of the short option, the underlying has decreased significantly, and I am approaching my max loss(i.e both the options are close to 0). In ...
0
votes
1answer
67 views

Why vega increases further out in time

Why do back months options have a higher vega than front month options? If possible , kindly explain on an intuitive level without a lot of math.
0
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1answer
123 views

Why does expected price of OTM option not equal to BS price?

If I assume that stock returns follow normal distribution with drift = 0% and S.D. = 10%. In the long, if I keep investing in this stock for a year with the same capital every year for a consecutive ...
0
votes
1answer
56 views

Pricing of a call option in one period binomial model

You are given a $5\%$ call option worth $\$2.66$. The strike price $k$ is $\$41.00$. $S(0)=40$, $Sd=35$ (i.e the lower price of the stock at $t=1$) find $Su$ (i.e the high price of the stock at ...
5
votes
1answer
234 views

How to approximate the time to mean reversion for implied volatility

Given an option and its implied volatility, and also the mean value of the implied volatility over the last 30 days, if we find that the current IV is significantly (> 1 std dev.) away from the mean, ...
4
votes
2answers
581 views

Why an option has sometimes and implied volatility greater than 100%?

Sometimes, in an option chain, the implied volatility of an option is greater than 100% . How is this possible? I mean, it is possible for 100$ stock to increase more than 100%, but not decrease more ...
4
votes
1answer
168 views

What does the “-E” mean at the end of a CBOE options symbol?

Below is are some option quotes taken directly from the CBOE website. I am wondering what the -E, -4, -8, -A, -B, -I, -J etc..that are at the end of the options ...
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vote
2answers
452 views

Why is the vega of an at the money option so insensitive to movements in volatility? I.e, why do ATM options have such little Vomma?

I've been trying to understand why at the money options have very little vomma. I was reading and came across a graph that showed vega as volatility changes and I couldn't grasp how the relationships ...
1
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0answers
71 views

Straddle neutral strategy

What does it mean to implement a delta-neutral strategy for straddle ? A straddle consists in buying a call and a put simultaneously, at the same date, on same underlying, with same maturity and ...
8
votes
2answers
5k 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, ...
5
votes
1answer
143 views

Which volatility to use to price options on futures contract?

I have some questions regarding pricing futures options and I just want to be sure that my thoughts are correct. I am trying to price options on futures for american & european style. In the ...
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votes
2answers
89 views

Option greeks: sensitivity to 1% move

In a Black&Scholes framework how can I compute the following sensitivities: to 1% move in the underlying price to 1% move in implied volatility I would like the greeks to tell me how many ...