800 reputation
513
bio website
location
age
visits member for 3 years, 5 months
seen Jun 5 at 22:16

Jul
2
awarded  Curious
Jan
31
awarded  Yearling
Jan
31
awarded  Yearling
Jan
18
awarded  Popular Question
Dec
17
awarded  Nice Question
Jan
31
awarded  Yearling
Nov
4
comment Do binary options make any sense?
I short binary FOREX options to hedge my long FOREX position, and don't really think of them as gambling.
Nov
4
asked Can binary model lead to non-normal distribution?
Oct
25
comment Can you replicate an option on an arbitrary basket of stocks?
We're quants. There are no commissions. There is no spread. Our biggest problem is getting hit by those damn frictionless physicists!
Oct
25
comment How to extrapolate implied volatility for out of the money options?
Re Jiang and Tian, if your extrapolated volatility is linear (fixed slope), don't you eventually have further-out-of-the-money calls costing more than nearer-out-of-the-money calls?
Oct
20
comment Can you replicate an option on an arbitrary basket of stocks?
I disagree with Tal. It can be done, but, unless you assume perfect liquidity and zero commissions, the incidental costs would be too high.
Oct
17
comment Probability distribution of maximum value of binary option?
I'd settle for a non-closed-form solution or approximation. This could be modeled as a random walk with drift, but the drift itself changes with each step.
Oct
16
comment Probability distribution of maximum value of binary option?
Good point. I was thinking Black-Scholes.
Oct
15
asked Probability distribution of maximum value of binary option?
Oct
15
comment What are the rules for quoting option prices on the market?
Most exchange-traded options trade in pennies (2 digits past the decimal point); FOREX options trade in pips (4 digits past the decimal point). Some FOREX brokers will quote the underlying in decipips (5 digits past decimal), but I haven't seen anyone do this for options (yet...?)
Oct
15
comment How to replicate a digital call option
I'm actually not convinced that you can replicate a binary option with vanilla options, even with arbitrary strike prices. Reasoning: a binary option's payout graph has an infinite slope at the strike price, whereas all vanilla options (and underlyings) have finite-slope graphs. I don't think you can add finite-slope combinations to get infinite slope, unless you use an infinite number of them.
Oct
15
comment How to derive appropriate volatility for a binary option (with strike/term) from market data?
If you just need a Perl formula: github.com/barrycarter/bcapps/blob/master/bclib.pl#L1214 or in Mathematica: github.com/barrycarter/bcapps/blob/master/nadex.m#L64
Oct
10
comment How to price a volatility-index option?
You can price a VIX option by looking at the volatility of the volatility. This is called vomma: en.wikipedia.org/wiki/Greeks_%28finance%29#Vomma (this doesn't answer your question, but might be trivially helpful)
Oct
10
comment What functional form describes the implied volatility curve?
For fixed time and near the current price, the implied volatility as a function of price is "bilinear"-- a negative slope line that bottoms out at the current price, and then a positive slope line. However, this yields contradictions if extended too far from the current price AND doesn't help at all w/ volatility over time. Have you tried curve-fitting existing data?
Oct
10
comment Reference on Markov chain Monte Carlo method for option pricing?
Assume you've looked at en.wikipedia.org/wiki/Markov_chain_Monte_Carlo ?