All Questions
78 questions
21
votes
4
answers
9k
views
How to solve for the implied stock lending rate given equity options prices?
When market makers price options on hard-to-borrow equities, they include the cost to borrow the underlying equity that their broker is going to charge them to sell the security short to hedge. I'm ...
- 513
17
votes
3
answers
622
views
How do you characterize dividends for equity options?
While many systems like to treat dividends as a continuous yield when pricing equity options, it works quite poorly for short-dated options.
In the short run, deterministic dividends are clearly the ...
- 15k
6
votes
1
answer
2k
views
Science behind options pricing into Earnings event
I am wondering about studies regarding the uncanny options pricing into public company's earnings reports.
The phenomenon being that the price of a straddle before earnings costs near exactly the ...
- 1,872
6
votes
2
answers
938
views
In a covered call strategy, should I hold the call or sell/roll if the delta becomes too small?
I am tweaking a covered call algorithm. The short leg consists of out of the money call options. The goal is to collect the tim premium, but an equally favorable circumstance is when the call ...
- 1,872
5
votes
2
answers
7k
views
Best topics to begin Quantitative Finance Research/Programming
I have a background in mathematics (Functional Analysis and Probability Theory) and am looking to acquaint myself with research in quantitative finance, particularly with a programming component.
...
- 469
5
votes
2
answers
4k
views
call vs put open interest
I have been observing the data for US stock options.
In general, it seem like there are more open interest for call rather than for put, is there a reason people like to write more call?
at the ...
- 101
4
votes
2
answers
2k
views
Poker and Options Trading
Certain trading firms (i.e. Susquehanna International Group) believe playing poker can help a trader better perform in the market. What is the rationale behind this? How exactly does playing a card ...
- 41
4
votes
3
answers
2k
views
Black Scholes and high dividend paying stocks
I understood there were 3 alternative methods of dealing with dividends in BS:
1) using a continuous dividend yield as an input; or
2) setting dividends to zero and subtracting the PV of divs from the ...
- 41
4
votes
1
answer
877
views
Put pricing embedded in autocall
When pricing an autocall, there are 3 parts:
Strip of coupon,
Zero coupon bond,
Put down and in.
Probabilities of a call is given from the trigger level on call dates.
However, let's say my ...
- 327
4
votes
2
answers
3k
views
Pricing Corridor Variance Spreads
Recently in the equity derivatives market there have been some trades on what are known as "Corridor Variance Spreads." The large equity derivative dealers and investment banks have been promoting it ...
- 41
3
votes
1
answer
1k
views
Why buy/sell a forward starting option?
More precisely, in equity markets, why would one prefer to buy a forward starting option over a vanilla option ? What about the selling side ?
- 165
3
votes
1
answer
1k
views
Option on index vs option on index future
Cash-settled options on the S&P 500 index existed before options on futures on that index. Where would the demand for options on futures have come from prompting the exchange to begin listing them,...
3
votes
0
answers
216
views
Option-like behaviour of momentum strategy
this may come as rather vague question, since I do not have something very exact issue on my mind. Nevertheless, I think this is an interesting question and must have been thought by some other people ...
- 94
3
votes
0
answers
134
views
American CRR implied vols
Given I have all other parameters lined up with the market (borrow rate, dividends...), if I imply volatility using CRR tree from american call and put with the same strike and expiry, will I always ...
- 31
2
votes
3
answers
10k
views
Why multiply stock returns with $\sqrt{252}$?
When converting daily volatilities to annual volatilities one need to multiply with $\sqrt{252}$.
But I found this piece of code this piece of code who calculate log-returns in the following way: In ...
- 79
2
votes
1
answer
243
views
Confusion with the equity option skew
In general out of the money (OTM) equity options have higher implied volatility (IV) than at the money (ATM) options. So assuming we have two put options (5% OTM and 10% OTM). Skew reveals that 10% ...
- 179
2
votes
1
answer
93
views
Why do Futures Contracts use variation in the US, but options don’t?
Sorry if this is obvious, but I was reading up on Futures and the concept of variation margin intrigued me. Options settle like Stocks and have unrealized gain/loss without affect on cash flow during ...
- 21
2
votes
3
answers
96
views
Option with company earnings as underlying
I need to calculate the fair value of an option, with the underlying being the earnings of a listed company.
I believe the best way to achieve this is to simulate the earnings of the company and I ...
- 199
2
votes
1
answer
185
views
PPPN: premium with real market data
A few days ago, I posted a question about PPPN's (partially principal protected notes), which can be found here:PPPN: participation rate, stocks and premium.
A PPPN in short is a structured product ...
- 143
2
votes
1
answer
254
views
OTC Equity Options' Dynamics
This only applies to options that do not have marketable equivalents since margin can be marked to them.
I've never been able to find this on my goog.
How is margin typically calculated for OTC ...
user3232
2
votes
1
answer
124
views
Single period risk-neutral probability derivation
Let $S_u$ be the price of stock in the up-state one period from now. Let $S_d$ be the price of the stock in the down state.
Let $C_u$ be the payoff of a call option at time $1$ in the up-state and ...
- 29
2
votes
1
answer
189
views
Simulating assets of different currencies
I have a situation as follows:
One year call option on a Euro stock with a Euro denominated strike.
Knock in feature as follows -
The option can only pay out if the growth in the Euro stock over ...
- 21
2
votes
1
answer
106
views
Gordon's dividend valuation model: Ignoring optionality
Currently studying some papers on Behavioral Finance (the dividend puzzle), which employ some basic valuation models, calculating stock's fundamental value $P_t$. The most known is the discount of ...
- 1,426
2
votes
1
answer
203
views
Equity repo close to money market rates?
I've noticed that the repo rate (here I mean the effective financing rate of the forward position in stock) implied from synthetic forwards is almost the same as money market benchmark (XXXibor 3M) ...
- 31
2
votes
1
answer
360
views
Index implied repo gerater than the stock repo
I've observed that the repo rate implied from options on Euro Stoxx 50 is significantly higher than the repo rate implied from options on individual stocks that are constituents of the index. This is ...
- 21
2
votes
1
answer
151
views
Using return on equity instead of risk free rate when pricing an equity call option
I am currently a second year university student studying business, so excuse my lack of knowledge regarding the subject.
I am currently studying the binomial options pricing model, which involves ...
2
votes
0
answers
297
views
spinoff entity value / adjusted close of a spinoff
When company $A$ spins off company $B$ (i.e. $A = A'+B$), how do we know exactly the adjustment factor of $A'$ and $B$ before trading
Note I am not asking to value the new companies. That's a whole ...
- 807
2
votes
0
answers
51
views
Where could I get European non-dividend option data
I am pretty new to option pricing. I got a task asking me to price a stock option, which should be an European non-dividend option, and compare my price to its quote. I used to use TSLA data ...
- 21
2
votes
0
answers
382
views
VIX/SPX Realized Beta Calculation
In https://globalmarkets.bnpparibas.com/r/Volatility_Express_20171128.pdf?t=BG3REXwMP3NZJRN7wY5Vt&stream=true, it states that
3M VIX/SPX realized Beta calculation:
Use a blend of 1st, 2nd and 3 ...
- 2,662
2
votes
0
answers
84
views
Capital increase: which stock price to use as input to Black-Scholes formula?
For an exercise we have to calculate the theoretical value of a scrip / preferential right on its issue day (23 April) in the context of a capital increase. The scrips are issued on 23 April. The ...
- 21
2
votes
1
answer
1k
views
VAR of portfolio containing options, equities and forwards
If we want to calculate VAR of a portfolio using variance covariance matrix (delta normal method), containing equities, forwards and options, how do we treat each asset class for making the variance ...
user18663
1
vote
1
answer
337
views
Why doesn't Variance-Gamma process flatten volatility skew for short term options?
The Variance-Gamma (VG) process, from my inexpert point-of-view, seems to nearly perfectly model equity distributions.
For longer term options, there is little to no volatility, skewness, or kurtosis ...
user6500
1
vote
2
answers
4k
views
Difference between Closing Price, Last traded price and Settlement Price for option contracts?
What is the difference between Closing price, Last traded price and settlement price ?
I got the difference between Closing Price and Settlement price from previous post :
The difference between ...
- 2,248
1
vote
1
answer
133
views
Role of next month's dividends in forward pricing
I'm using the equations given on this page to price forwards on an equity.
It's a basic equation that discounts dividends.
But my question is: What do we do about dividends that occur after the ...
- 313
1
vote
1
answer
520
views
Market Making in practice
I read some of the papers in the market making literature such as: Avellaneda - Stoikov market making model but was wondering if these types of models are actually use in pratice?
It seems that when ...
1
vote
1
answer
164
views
If there was a way to back out implied volatility (IV) from a stock, would it be the same as the IV backed out from an option on that same stock?
I know that it is not possible to back out an IV for a stock, because the concept of IV is based on a model with underlying assumptions applied to pricing an option.
I was thinking of why IV is ...
- 2,231
1
vote
1
answer
170
views
Why does an autocall on a linear payoff have vega?
Consider a (stochastic) linear index, say $I(t)$, in that it grows at the risk free rate (with some volatility of course). There exists a maturity date $T$ on which I receive $I(T)$; however there is ...
- 2,561
1
vote
3
answers
102
views
What is the benefit of buying stock options vs. purchasing stock? [closed]
I am aware that this is a simple question; but, given the scenario below, I have not found a satisfying answer while searching this site or Google.
My understanding
Stock options have been described ...
- 11
1
vote
1
answer
126
views
Adjusting your delta hedge when the stock crashes and were originally delta hedged
You are long a call option on a stock and you are delta hedged. The stock crashes in price. How do you adjust your delta, do you buy or sell stock?
Could answers please be quantitative (i am getting ...
- 2,662
1
vote
1
answer
468
views
Put-on-call option confusion
So the question asks: Given a 3-steps Binomial Tree model with $S(0) = 50$, $U = 20%,D = 20%$, and $R = 5%$. A European call option has the strike price $X = 40$ and maturity time $T = 3$. Also, a ...
- 171
1
vote
1
answer
253
views
Where do Over-allotment (Greenshoe) option shares come from?
I'm just wondering, if following an IPO the share price goes up and the underwriter calls the option, where do those extra 15% shares come from?
Does the company have to issue more stock to cover the ...
- 113
1
vote
1
answer
2k
views
Differences between Snowball, KIKO and TRF derivatives?
Can you explain what are some similarities and differences between snowball, KIKO (knock in knock out) and TRF (target redemption forward) derivatives?
Carl Im
1
vote
1
answer
380
views
What is the other type of impact of dividends on the stock price in this formula?
Excerpted from Marek Musiela and Marek Rutkowski's Martingale Methods in Financial Modelling, Second Edition.
I think I understand formula 3.71: paying cash dividend $\kappa_j$ at time $T_j$ will ...
- 913
1
vote
1
answer
586
views
Selling an American call option early
I understand it is never optimal to exercise an American call option early. [1] [2] However, here are my two contradictory thoughts about selling an American call option early.
Assumptions
I can ...
- 113
1
vote
3
answers
267
views
Are power contracts traded on any stock market?
Are power contracts traded on any stock markets ? What about OTC markets ? I ask about the derivatives where payoff is some exponential function of difference between strike and spot price.
- 1,018
1
vote
0
answers
83
views
Autocall Selling Process [closed]
I'm new in structured products and I need some help for understanding some stuff on autocall.
When a client gives his money to the bank for investing in an Autocall, this money goes in a ZCB and in ...
- 11
1
vote
0
answers
4k
views
What does it mean to be long the skew?
Consider an equity option such as SPY and I'm long the skew, do I make money if puts raise in price and calls decrease or the opposite?
- 81
1
vote
0
answers
100
views
Attributing hedging p&l to several options
Given a delta-neutral portfolio of one underlying stock and several options,
I'm trying to attribute stock trading p&l to the options
(assuming the underlying is traded only for hedging purposes)....
- 111
1
vote
2
answers
201
views
Practical approach to get average option IV
Is there a practical method to calculate some sort of average IV for each level of moneyness of equity options?
I'm thinking of an algorithm to find mispriced options and do to so, we need to figure ...
- 296
1
vote
0
answers
153
views
Credit spread model
Let $c(t,T):=-\frac{1}{T-t}[\mathrm{ln}(P_1(t,T))-\mathrm{ln}(P_0(t,T))]$, with:
$c$ measure of how a company is prone to fail;
$P_0(t,T):=e^{-r(T-t)}$ price of no-defaultable bond.
$P_1(t,T):=\...
- 141