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12

A few pointers: When I looked into this a few years ago, a good solution at the time was LIM's XMIM, which also has an S-Plus/Matlab interface. Whit Armstrong also provided an R package for this, although I don't know how complete it is. This provides both the data and the software for analysis. On the very high end (and expensive) side of the spectrum, ...


11

There are a large range of products that are now being offered as "alternative beta". These try to provide consistent returns in a known systematic bias or strategy, as defined by an index tracking that strategy. ETF's can be a very good source of information on transparent quantitative strategies that have a published track record. See, for example, ...


9

I did some digging and found the following papers - most of them offering quite a distinct perspective compared to classical option pricing theory! Stock Options as Lotteries by Brian H. Boyer et al. (2011) The Efficiency of the Buy-Write Strategy: Evidence from Australia by Tafadzwa Mugwagwa et al. (2010) The following is my favorite: You could do some ...


9

Great question! I think the most useful starting point is Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options by Bakshi, Kapadia and Madan (2003). Their paper proposes a definition of model-free implied skewness (they originally called it risk-neutral skewness, but MFIS is more accurate), which they prove will ...


8

Interesting question. Unfortunately for you, the answer is no, it cannot be done. The principal difference between a basket of options and an option on the basket (or index) is correlation risk. In fact, there is a systematic difference between the implied volatility of the basket and the (properly weighted) sum of implied volatilities on the components. ...


8

Market makers, obviously, have to be willing to short an option. They will delta hedge their positions to limit risk. As for investors, they can aim for a buy-write strategy to collect extra income in lieu of unlimited upside. And lastly, someone who owns a stock he can't sell right away (such as an entrepreneur still under a vesting period after his firm ...


7

Root around in ETFdb Categories, particulary in Quantitative Methodology ETFs, Hedge Fund ETFs, and Long-Short ETFs. Not all of the ETFs listed are completely transparent and completely quantitative but ETFdb is a good start.


7

The paper "Do option markets correctly price the probabilities of movement of the underlying asset? " by Yacine Aït-Sahalia, Yubo Wang, and Francis Yared should in my opinion provide many very usefull elements for this question (look in particular at section 3). Regards


7

A good place to start learning about option market making using quantitative techniques is Euan Sinclair's Option Trading (chapter 10 is devoted to market making techniques). He also gives a decent introduction to a more sophisticated quantitative market making technique which he calls information-based market making. Specifically, he explains how to apply ...


7

Theta decay doesn't depend on the in the moneyness. A 70 delta call and a 30 delta call have very close theta decay at any given moment. They are slightly different because of skew with 70 delta put having slightly bigger theta. Theta is the decay of extrinsic value. In practical trading, you can assume your decay distribution (using your graph is fine) ...


6

This depends a little bit on your definition of volatility arbitrage but in general what is meant is a strategy that takes advantage of the difference between implied volatility and realized volatility. Normally you receive implied variance and pay realized variance. This strategy is the classical example of picking up nickles in front of a steamroller ...


6

A further comment on user214's answer : the probability distribution of the future value of the index that you imply from option prices is its distribution under the (market) risk-neutral measure, which generally different from the true historical measure. In particular, option prices do not give information about the risk premium. There is a vast literature ...


6

Just would like to expand on user214's answer: you can use options to predict underlying in probabilistic sense. As you know option prices imply a certain distribution - you can find expected value for stock, and volatility around that value. If you assume a particular distribution (for example normal distribution for returns) you can derive expected high ...


6

If you think of a path as a series of ranges then your idea kind of makes sense. However, I don't think you would get a path out of this approach, just a series of ranges. Example: Taking one expiry, the prices in a chain imply a range of price movements between today and expiration. Take the SPX(at say 1300) and VIX, for example, is at 15.8 and the SPX ...


5

Since I, too, have been very interested in this question, I will share some of my findings in the dual hope of encouraging comments on the papers and eliciting more activity on this question. Ammann, Skovmand, and Verhofen (2008): Implied and Realized Volatility in the Cross-Section of Equity Options Ang, Bali, and Cakici (2010): The Joint Cross Section of ...


5

Option Traders Use (very) Sophisticated Heuristics, Never the Black–Scholes–Merton Formula Stock Price Clustering on Option Expiration Dates Option Returns and Volatility Mispricing


5

For single stock options against index options, this may be of interest: Dispersion -- A Guide for the clueless


5

When testing your strategy, what you need to pay particular attention to is performance attribution, in other words why did you see the returns you did? Let me give you a simple example to illustrate what I mean. Suppose I have an algorithm to pick stocks and you have a testing database of stock prices for one year. Suppose also that in that year the market ...


5

The option is a contract that gives you the right to buy the stock in one year for 18. Today people are trading the stock for 20, so you can sell the stock short for 20 today. Selling the stock short means someone will give you 20 cash today in return for a stock IOU, where you are obligated to deliver the stock to them on a later date. So you get 20 cash ...


5

You can find an exact algorithm with a step-by-step explanation here: https://www.dropbox.com/s/t4fq067kzx26mhw/project_paper.pdf As you can see from the URL it is an archived document because the original site is unfortunately long gone and the tool referenced in the paper with it :-( But it should be helpful anyway to understand what is going on. Notice ...


4

There is one more solution available now to backtest option strategies: www.oscreener.com! This tool allows to screen and backtest bull put spreads, long calls, short puts, debit spreads etc and validate these strategies in seconds.


4

The best solution in most cases where one is backtesting from a non-standard universe is to construct your own index. I believe that to also be true in your case, as there is no standard index tracking the returns of a particular basket of options. VIX, in particular, is more accurately thought of as a price index, not a return index, in the options world. ...


4

I suggest you avoid using the VIX for implied vols. Why? One has to consider that the VIX is not simply solely dependant on the dynamics on the S&P 500 anymore because the VIX can be traded via options, etc. Thus many more parameters affect the trajectory of the VIX. The VIX has to equal the ATM option vol because this is where arbitrage assumption ...


4

As a complement to chrisaycock's answer, I would also say that shorting options is useful when you want to create option strategies. Buying and shorting options on the same underlying with different strike prices allows the investor to create products with elaborate payoff which allows them to be more on a range of the underlying's price rather than on its ...


4

The first Google result seems clear enough: A seagull option is structured through the purchase of a call spread and the sale of a put option (or vice versa)....This structure is appropriate when volatility is high but expected to fall, and the price is expected to trade with a lack of certainty on direction. So, for example, you might buy the 105% ...


4

The data has definitely not disappeared, it's a problem with your vendor. There has been a corporate action on 2014-02-27 and hence the strike prices have been adapted accordingly. According to Bloomberg bsym your P69 (composite ID BBG004L7P7L6) became P68.63, and P70 (BBG004L7P8C4) became P69.63.


3

I just thought it is worth mentioning that the skew of the underlier implied by traded option prices and the options implied-volatility skew are indeed related by no-arb relation. The point is that you can integrate implied variance over the strike prices to get the unconditional implied variance (and hence volatility) of the underlier and the skewness of ...


3

This is the paper for you: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1107464 From the abstract: The shape of the volatility smirk has significant cross-sectional predictive power for future equity returns. Stocks exhibiting the steepest smirks in their traded options underperform stocks with the least pronounced volatility smirks in their ...


3

If you're asking "can I get a prediction of a future price from an option chain", then, no, I don't think so. The value of an option does not depend on the underlying stock's drift, or price expectation, because this expectation is already reflected in the stock's current price. Given the risk-free rate and the time to expiration, all that you can back out ...


3

You answered your own question with the statement it began with: "Since if the option's price is lower than its intrinsic value (eg. strike price - current stock price for puts), then an arbitrage opportunity arises from buying the option at bargain and then exercising it..." An options price cannot be lower than its intrinsic value (for any discernab,le ...



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