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seen May 11 '13 at 3:37

Mar
21
comment Call options portfolio: what would the underlyings' moments to be maximized?
Any non-tail measure of risk would probably work on a portfolio of options since you are still losing money due to theta.
Mar
15
comment Theta's effect for OTM options
The graph would be more instructive if you normalize it by some unit of convexity risk (either gamma or vega). Then you'd actually see what is your theta for similar risk position and be able to judge if it's "high" or "low".
Feb
16
comment How to improve the Black-Scholes framework?
Yeah, but do you think he was actually owned an awesome alternative to BSM or simply had a good model for relative dynamics of the implied vols? There seem to be plenty of high science alternatives to BS out there, you just can't really apply them to real world.
Jan
19
comment Delta of a Down and Out Call
At the limit, obviously, the risk on the structure is a risk of a knock-out forward, which is still much easier to manage then a risk of a down and in put, for example - the dynamics are much tamer.
Jan
19
comment Delta of a Down and Out Call
"Market convention"? What market are we talking about? FX? Maybe. In equity derivatives, down and out calls are mainly traded as part of structured notes and frequently actually have strikes below the barrier. As I said, these are very tame an easy to manage. The discontinuity is fairly small - you would have to compare it to the discontinuity for continuous in-the-money barriers to see what "huge" discontinuity really is.
Jan
9
comment What data transformations to use in regression of credit spreads on equity prices?
Not even thinking thus far, just simply pointing that equity options are more like the CDS rather then equity itself. If you look at the regression of VIX vs something like 5y CMT IG, it's a pretty reasonable regression, since both series are more or less stationary and are indicators of risk.
Jan
9
comment What data transformations to use in regression of credit spreads on equity prices?
My first intuition is that more likely that it's either equity implied volatility and credit spreads that should be regressed, no?
Nov
26
comment Implied Volatility for Asian option
There are some semi-closed form solutions to Asian options. The stupid things trade so tight that it's almost impossible to make out if you are off because of the vol surface differences, business time calculation or modelling differences. I have been to a place where Asians where calculated on local vol model as well as to a place where we used some sort of moment matching model - guess what, both places we some times where off market, except in case of local vol model my junior had to stay till 9 pm to get the P&L and risk for the book.
Nov
26
comment Changes to option valuation for dollar-pegged underlying
If I recall correctly, the key problem is that while the index is priced effectively in dollars, the margin is in RUB? In that case, you can think of this as an ADR option with premium/payout in domestic currency and the asset itself in the foreign currency. The fact that the exchange does not pay interest on the margin in an environment where rates are pretty high adds another interesting aspect to the option pricing.
Nov
24
comment When does delta hedging result in more risk?
In theory, of course, a market maker is supposed to run a nice, balanced book and "earn money from the bid/offer spread" (good luck there, most trades print at mid). In real life you often get stuck in a lopsided position against your will. E.g. a large insurance company comes to roll a hedge or you "provided liquidity to an important client". "Stripping" decaying wing options is a pretty standard thing to do. As an alternative, you can manage it at a different implied volatility and many other tricks. No offence, but it does not sound like you have ever managed a large sell-side options book.
Nov
24
comment Setting the r in put-call parity?
Too add to complexity, it would also depend on what you are posting or taking in as collateral. The whole "rates and govies is now a risky business" thing is forcing all longer-dated OTC trades to move to forward premium.
Nov
23
comment When does delta hedging result in more risk?
Sell a short dated option, in this case more or less matching the amount of theta and delta hedge it.
Oct
31
comment Implied Volatility for Asian option
Yes, you would use the volatility for the same strike and same tenor. For the second one, I thin this is what your are looking for: www.dm.unibo.it/~pascucci/web/Ricerca/PDF/39_FPP.pdf
Oct
24
comment self-consistent parametric form for equity implied volatility
This one is worth a try. Thank you!
Oct
19
comment Why the interest rate for put-call parity is not constant?
You are making an assumption of constant dividends, which, for longer-dated expiries is wrong. E.g. when you trade a dividend swap, do you assume zero underlying delta? As I said before, the markets "convention" is somewhere between constant and proportional dividends. It is even more complicated because of the dividend growth assumptions past the announced dividends. You can easily prove it to yourself - go to your bloomberg, download the Dec14 strip and calculate forward prices from put/call parity. You would be unpleasantly surprised.
Oct
18
comment Why the interest rate for put-call parity is not constant?
You do realize that it's going to be a different D for every strike (just by nature of dividends being somewhat undefined)? In general, for market-making in longer-dated options, there is no way around making a dividend process assumption. For most things you'd do as a non-MM, your sensitivity to the dividend assumptions is going to be fairly low anyway.
Oct
15
comment Trading a synthetic replication of the VIX index
Thoughts? Not really :) At the time I was simply trading root-time vega-equivalent amounts of front month variance swaps. Not perfect, but good enough if you have a large book. However, it's not realistic for a non-market-maker since the bid/offer on short dated variance swaps is borderline ridiculous these days. So my advice would be to isolate the alpha-bearing feature of the VIX that forces you to think about replication (e.g. you want to be short gamma or you think the skew is rich etc.) and trade that feature alone.
Oct
9
comment Trading a synthetic replication of the VIX index
At my previous job, I have, actually, replicated VIX index for a structured note. Straddles are not going to work - mainly because of differential decay and gamma creep. You can try replicating the strip, but on such a short-dated horizon (30 days) you will be pretty hard pressed to keep the weighting perfect.
Oct
5
comment Pair Trading Index Options
Well, as I said, it would depend on the trade that you are actually doing. If you are trading them as a conditional spread, it's terminal beta neutral and will have delta through the life of the trade. In this trade you actually want the basis to move (hopefully in your favour). If you are trading them as a volatility pair, your are going to be managing deltas separaterly for each option and you want to separate what part of the volatility is idiosyncratic and what part of the volatility is driven by beta. Am I answering your question?
Oct
2
comment equity linked notes (bull/bear equity performance bonds)
Well, simple. Go here: wikipedia or here some linke with formulas.