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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198 views

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: ...
6
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202 views

What is the most convenient data structure for backtesting a model of futures options prices?

I have an empirical model for the dynamics of futures prices in a particular market that I have implemented using a long series of the front five contracts. (I account for the roll in my model.) I ...
6
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0answers
134 views

Basket option density in BS model

Let X and Y be two GBM’s, they have each a univariate log-normal distribution for some time t, that is $X_t\sim{LnN(µ_x, σ^2_x)}$, $Y_t\sim{LnN(µ_y, σ^2_y})$ and $Z_t=[X_t,Y_t]\sim{ MvLnN(μ, Σ)}$ ...
6
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0answers
625 views

option chain data visualization, sunburst

I think option chains are not represented in the best way. With more and more options products coming out and trading on the various exchanges, I see vendors struggling to keep up with a good way to ...
5
votes
0answers
173 views

How should option prices differ when using the Heston versus the Black-Scholes model?

I am running Monte Carlo simulations for a European Call using Heston Model and I am trying to compare them with prices calculated using Black-Scholes formula. I am not quite sure if the prices I get ...
5
votes
0answers
170 views

Arbitrage free price of a derivative when the price is collected over the lifetime of the derivative

Let $X_t$ be an american style financial derivative with random exercise time $T$ where $t$ and $T$ belongs to some finite set $A$. Buying this derivative requires the buyer to pay $p_t$ up to time ...
5
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0answers
179 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, ...
4
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0answers
60 views

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 ...
4
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0answers
70 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 ...
4
votes
0answers
90 views

Risk neutral measure in exponential levy model

Is there a method of finding a risk-neutral measure for assets driven by the levy process? I understand there is the esscher transform but I think it tends to transform the processes into ...
4
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0answers
169 views

How to price an option with two volatilities?

Imagine you have two volatilities, the second which is "activated" when the stock crosses a barrier called $p_b$. The present price is $p_1$. ($p_b>p_1$). This can be used to price options after a ...
4
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0answers
196 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.
3
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59 views

Solution for american perpetual put

I have been attempting an exercise in which I have to determine the value of an american perpetual put, $P$ in terms of the asset value $S$. The solution to the exercise says: When $S>S_f$ (the ...
3
votes
0answers
104 views

Pre- Versus post-2008 Crisis Rates Modeling

Modeling for interest rate derivatives (such as bermudan swaptions) is said to have undergone significant changes since the crisis. Prior to the crisis, counterparty default risk was often ignored, ...
3
votes
0answers
292 views

Does Bakshi, Kapadia and Madan (2003) VIX building approach underestimate volatility?

From a paper that shortly addresses an alternative approach to VIX-like index building: To test this approach, I've built a fake book of B&S options with constant volatility equal to ...
3
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0answers
117 views

Estimating risk aversion (power or exponential utility) from options prices

I came across this literature and it seems like there are a number of ways people do this. You can do it for an option on any underlying as long as you can create the risk-neutral p.d.f. If you agree ...
2
votes
0answers
42 views

Capital increase: which stock price to use as input to Black-Scholes formula?

For an exercise we have to calculate the theoretical value of a scrip / preferential right on its issue day (23 April) in the context of a capital increase. The scrips are issued on 23 April. The ...
2
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0answers
73 views

Example of optimal delta hedging in G. Barles, H.M. Soner option pricing paper

There is a paper Option pricing with transaction costs and a nonlinear black-scholes equation by Guy Barles and Halil Mete Soner. And there is a section about optimal (delta) hedging, which I do not ...
2
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31 views

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 ...
2
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0answers
125 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
votes
0answers
50 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
votes
0answers
134 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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0answers
352 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
votes
0answers
59 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
184 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
61 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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349 views

Pricing options and bid-ask spread

Consider a non-liquid option market with a wide bid-ask spreads across all strikes. Spot: \$52 A snapshot of the \$50 strike shows: ...
2
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0answers
139 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
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
146 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
votes
0answers
171 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
votes
0answers
212 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.)? ...
1
vote
0answers
56 views

Problems with a Black-Scholes modified equation

I haven't really studied much financial mathematics until about 2 months ago so I'm quite new to this stuff, so I'm sorry if this is a trivial question. At the moment I'm trying to work out what the ...
1
vote
0answers
12 views

EMTA Guidelines

Does EMTA guidelines are only for Non-Deliverable trades? IF yes, then why this is applicable for Deliverable Option trades? EMTA Site - http://www.emta.org/ndftt.aspx
1
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0answers
46 views

Replicating American call option

Consider a two-period binomial model for a risky asset with each period equal to a year and take $S_0 = 1$,$u = 1.2$, and $l=0.8$. The interest rate for both periods is $R = .05$ a.) If the ...
1
vote
0answers
35 views

Effect of surprise dividends on options

The ETF in question is VDC It pays about $2.5 a year in dividends, but the payout dates are very erratic If I were to go long VDC with options, what would be the best way of doing this to avoid ...
1
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0answers
62 views

How was this probability of negative U.S rates by end 2017 calculated?

http://www.bloomberg.com/news/articles/2016-01-26/bets-on-negative-u-s-rates-by-end-2017-jump-above-10-chance Options markets show some investors are taking out protection in case rates instead ...
1
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0answers
32 views

Cumulants of variance gamma with stochastic arrival (VGSA) model

The characteristic function of the VGSA model is defined as a specific parameterization of the characteristic function of the CIR (Cox-Ingersol-Ross mean reverting process) time-change: $ ...
1
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0answers
73 views

Match different option high frequency databases

I downloaded the “E-mini S&P 500 (Dollar) Options for 1/10/11” Top-of-Book (BBO) data. If you are interested you may download the data from the following link (approx. 80MB zipped and 1GB ...
1
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0answers
160 views

Formula behind pandas.Options() implied volatility

I noted that implied volatility (IV field) from pandas.Options class is very different (especially, for out of money options) than what I compute with Black-Scholes model. (risk free rate is pulled ...
1
vote
0answers
84 views

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 ...
1
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0answers
36 views

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 ...
1
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0answers
95 views

Computation of option vega under CEV

It is easy to define the option vega $\nu=\frac{\partial C}{\partial \sigma}$ under Black Scholes model since volatility is a single quantity. However, under CEV or local volaility model, it is ...
1
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0answers
73 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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0answers
98 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 ...
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0answers
45 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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0answers
53 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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0answers
70 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 ...
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0answers
59 views

Opposite of hard to borrow?

If market participants are certain a stock will suffer a huge decline, the shares will become hard to borrow and an interest fee will be applied to borrow the stock. This interest fee eliminates the ...
1
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0answers
71 views

Underlying changes impact on implied volatility

What are some valid techniques that can be used to simulate how changes in the underlying are most likely to impact implied volatility along with the skew of all strikes for options with the same ...