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Nov
6
comment Black-Scholes: Why the focus on volatility?
I believe solving PDEs is a more sophisticated and also the more popular approach at exotic trading desks.
Nov
6
comment Black-Scholes: Why the focus on volatility?
Implied volatility is the expected future return volatility of the underlying asset over the lifetime of the option. It is not a value that is calculated but it is in itself something that is bid and offered in the market as a function of each trader's view on future volatility. Participants express a view on implied volatility and trade it, paid for through the translated option price. Implied volatility can be modeled and forecast and there are various models that accomplish such.
Nov
5
comment Black-Scholes: Why the focus on volatility?
@AndrewDabrowski, no, there are many approaches, pick whatever suits your needs. I find the approach through the risk neutral probability measure very intuitive, thats all.
Nov
5
comment why does graphic of log differenced of renminbi look similar to hkd?
Most likely it is related to low dollar volatility during that time period which impacted both USDCNY and USDHKD rates.
Nov
5
comment Trouble arriving at Black-Scholes Formula
Bob, thanks for the LaTex edit
Nov
5
comment why does graphic of log differenced of renminbi look similar to hkd?
Incorrect, a) returns in USDCNY are on average much more volatile than returns in USDHKD as you can see from your own charts, b) you can also see that USDCNY reflects more negative than positive returns while that is not the case for USDHKD.
Nov
5
comment Black-Scholes: Why the focus on volatility?
Andrew Dabrowski, please take a look at this question, (so far) you are incorrect in most of your claims regarding the subject matter of option pricing: quant.stackexchange.com/questions/8247/…
Nov
5
comment Black-Scholes: Why the focus on volatility?
But just to make sure, this was not the center of my answer, my answer attempts to make the point that implied volatility is the corner stone of option pricing. In fact, I claim that different implied vol levels cause more variation and potential error in pricing an option than the choice of pricing model (I cannot prove that but its a conclusion drawn from many years in the "war zone"). The choice of model in fact makes zero difference when dealing options as long as both counterparties agree on the same model at the time they translate IV-> Invoice Price. What they trade is IV, nothing else.
Nov
5
comment Black-Scholes: Why the focus on volatility?
IV = implied volatility and no, it is not an output but an input. Any reputable option dealer/trader/sales person should have a keen understanding at exactly which implied vol levels their products trade whereas hardly anyone knows the quoted prices. It is a huge misperception even within the quant community to believe that option prices are plugged in and what comes out is an implied vol level. A good comparison are bond price vs yields on the fixed income side: Hardly anyone quotes bond prices but everyone has a keen understanding (so I hope) of yields.
Nov
4
comment Question on Barrier Option and Skew
To shift into slightly higher gear, when the barrier is breached you, due to put-call-symmetry end up with a cost-less ability to convert your puts into calls and are thus fully hedged after the option knocks in. Now, to get a clue about skew think about how the various risks change pre vs post knock-in. I do not think its too hard from here...
Nov
4
comment Question on Barrier Option and Skew
Kind of, now if you read up on put-call symmetry, you will should be able to deduce a strategy (buying certain number puts with certain strike) to hedge the down-and-in call when barrier B < Strike. (Hint: K/B number puts with strike at B*B/K)
Nov
4
comment Question on Barrier Option and Skew
Now, why do you think this would not work if barrier < strike? Look up put-call symmetry.
Nov
4
comment Question on Barrier Option and Skew
Hmm, why not simply selling the put and buying a vanilla call when the barrier is breached. Will it cost you anything to make the conversion? Think of put-call parity and the fact that we started out with Barrier = Strike.
Nov
4
comment Question on Barrier Option and Skew
Also, google and read up on put-call symmetry and report back, unless you by then already got a clue about the skew risk of your barrier option.
Nov
4
comment Question on Barrier Option and Skew
I am willing to help if you, the OP, work through this together: First thought, and I like to hear your input on is: Imagine you are a trader and just sold a down-and-in call to a client (lets make it easy and lets say the barrier is set equal to the strike of the underlying option). How would you hedge the risk at the initiation of the trade? Explain why it makes sense to buy a vanilla put at initiation and why you are hedged as long as the barrier is not broken. Also, think and explain how you need to adjust the hedge if/when the barrier is breached.
Nov
4
comment Semi-strong efficiency and HFT
@BobJansen, absolutely, that is exactly what I am saying. If markets were even semi-strong form efficient hedge funds, sell-side firms, and buy-side firms would not exist. We would all just invest in broad market indexes. Any different view on this topic?
Nov
1
comment Relationship in Order Book between S&P500 and S&P500 Futures Contracts
Regarding your question, try to look at the big picture. In financial trading it all comes down to the transfer of risk. If new risk is initiated then that "trickles down the system". Someone going long large amounts of S&P futures may transfer risk but the counter parties in the market, such as market makers or sell-side firms may hedge such risk in the index or futures which counters the long initiation. Look at large option trades and google "pin risk" and you see that prices are more often than not trading around large strikes especially in large fx options close to expiry.
Nov
1
comment Relationship in Order Book between S&P500 and S&P500 Futures Contracts
PLEASE, can you mark more of the answers given to your questions as complete or comment on why the answer(s) is/are not sufficient? I know I repeat myself but you keep on asking questions but hardly provide any feedback or mark answers as being sufficient. I find it disrespectful to keep on asking heaps of new questions without commenting a thing on the help others provided.
Oct
31
comment Machine Learning vs Regression and/or Why still use the latter?
Would upvote multiple times if I could. Though, I slightly disagree with your hft claims. I would categorize the "quant IQ" requirements to implement hft algorithms as being very low, on the other hand be a top notch programmer and you most likely make more than any of the quants at a meritocratic hft house.
Oct
31
comment compute sharpe ratio for options?
Your edit makes your question even more confusing: 100 call options (each contract representing 10 shares) and a strike price of 25 pounds makes that a cost of 25k pounds not 250k. Same with the proceeds you receive upon selling the delivered shares at market price. Also, you should read up on the basics of risk adjusted return measures. You need to generate a string of returns before you can calculate the variation of such returns. So, I still do not understand what you try to achieve here???