# Tag Info

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Calendar spreads have a number of disadvantages for trading Vega: Vega in different months are generally not additive, some traders use root-time-Vega but it does not remove the additional risk. You are trading time spread not just volatility, so be careful Calendar spreads are affected by dividends and rate changes - another source of risk. A ...

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You can construct delta and gamma neutral option portfolio, but: It won't generally stay neutral forever, so you would still have to constantly rebalance it by trading additional options (thus paying more transaction costs and creating mess in the portofolio). Anything will break the neutrality - underlying move, time passage, implied volatility change ...

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you get a volatility skew by imposing a neumann-like barrier if market makers think a stock won't surpass a certain threshold, a skew is inevitable if one were to match the pricing under a barrier with the BS formula https://en.wikipedia.org/wiki/User:Barrieroption/sandbox

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Yes, Black Scholes breaks down absolutely for real market conditions at deep in the monies. Please remember that this isn't my specialty, so I can only give my observations. The reason to me seems that only variance can be specified because BS assumes lognormality. Prices certainly aren't lognormally distributed. The best fit I've found is logVariance ...

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Most likely you are looking at bid prices which are lower that fair (theoretical) price. It is very common that bid price of an ITM option is below the lower bound as bid-ask spreads are wide. The IV of ITM call at theoretical price should match IV of OTM put at corresponding strike. If this does not happen then check your forward price, rates and dividends. ...

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The lower bound is not just a BS-specific bound. It is a no-arbitrage bound and so if the price is lower than this, you have an arbitrage opportunity (some good explanation here). It doesn't mean it is present in the market necessarily, because mid price is not necessarily the price you can trade and when you take spread into account this is likely to go ...

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So we have the identity $$g(S,\sigma, t, C,C_t,C_S,...)=g(S, t,\sigma, V,V_t,V_S,...)$$ where $S$, $\sigma$, and $t$ are independent variables and $V=V(S,\sigma,t)$, $C=C(S,\sigma,t)$ are some unknown functions. But we can also treat the above identity formally and assume that the functions $C,C_t,C_S,...,V,V_t,V_S,...$ are themselves independent ...

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