Questions tagged [option-strategies]
The option-strategies tag has no usage guidance.
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Wheres is this method/notation of option portfolio payoff design from?
The "desired position" in the image is a set of slopes $(0,1,-1,0)$, and a set of strike prices between these slopes $\mathbf{K}=(98,100,102)$.
The payoff is then designed by finding the positions $...
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2answers
84 views
Transaction costs in option market
The transaction costs in option market could be quite large. The bid ask spread of a SP500 firm could be around 15% of the mid-quote when I check the data. Since I do not have data on transaction ...
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0answers
46 views
sharp ratio/sortino ratio for options portfolio
I am thinking that the sharp ratio is not a valid performance metric for a long/short options book, because options are inherently nonlinear and the standard deviation simply cannot correctly capture ...
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0answers
37 views
Understanding delta based strike selection in an Iron Condor
I am reading a small book on the proper use of Iron Condors (link). I do not use these strategies as I have had a very hard time being profitable on them. This book mentions some strategies to ...
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1answer
61 views
Papers on synthetic options
I'm looking for some scientific papers to get a better grasp of synthetic options mainly the valuation, eventual time decay etc.. I've looked in my university library and only but I only found obscure ...
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1answer
192 views
Delta Hedging/ Exchange for Currency Options
I'm looking at 2 cases of hedging EURUSD, using call spread or range forward.
Lets say spot is 1.1300 and my buy call is at 1.1300 and sell call is at 1.1500. Hypothetically I'm assuming that this is ...
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1answer
59 views
Call Option Overvalued and put-call parity [closed]
I have a question regarding if a Call option is overvalued compared to the call price and how you can benefit from the Arbitrage opportunity.
My thoughts are as follows:
Step 1: Short the call ...
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96 views
Exotic option arbitrage
Suppose an exotic European option has a sub hedging (price being lower than the target) portfolio of vanilla European options all with the same expiry as the exotic option. The sub hedging portfolio ...
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1answer
107 views
Is there an advantage trading options based on deep in the money Open Interest Volume ratio
Problem:
Deep in the money options contracts will be assigned at expiration date.
Higher Volume ratio of deep in the money contracts at expiration calls or puts leads to day after expiration date we ...
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0answers
34 views
Correct beta weighted delta options formula?
Is this the correct formula for beta weighted delta: http://www.nishatrades.com/blog/beta-weighted-delta
I've seen this What is the formula for beta weighted delta and gamma? but they seem to be ...
2
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0answers
95 views
Portfolio Delta - long call, long put and short call
First and foremost, I'm trying to understand why you would construct a portfolio made up of long calls, long puts and short calls. I find this really abstract and confusing. I've tried drawing the pay-...
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1answer
49 views
Iron condor with positive vega
I am backtesting this Iron Condor before earnings.
In the position summary Vega (Mid Quote) is -3.04\$ but in the chart below (IV vs Profit $) it's clearly shown that a decrease in volatility will ...
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1answer
379 views
Is short-gamma inherently a losing strategy?
With regards to a recent blowup of optionsellers.com - several analysts (specially on Quora) are blaming it on their strategy of being short gamma i.e. selling options. Is it correct to call short-...
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0answers
140 views
Arbitrage from ATM option trading?
So I was testing out a collar options strategy (long put, short call, and long shares of the underlying stock) in a backtest for a school finance project, and the profits & losses are given by the ...
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2answers
127 views
Delta neutral strategy using a combination of put and call options
I am learning about quantitative finance and currently learning about delta neutral strategies. The examples given are most of the times of the form: if you buy call options, you can hedge your ...
8
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1answer
370 views
Swaptions Gamma Interview Questions
A while ago, I interviewed for a trader role and was given the below assignment (I didn't get the job). I wanted to revisit the questions to learn from my mistakes and be better prepared next time. ...
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1answer
312 views
Risk management tools for long term Gamma/Vega sellers subject to margin calls
TL;DR: if you're a retail investor and you systematically sell long-term vertical spreads while staying Delta-neutral, your main risk comes from Vega and the Gamma of opening gaps that can throw you ...
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1answer
57 views
Strategy to write uncovered put and call
I found a strategy called "covered combo" where you sell 1 put, 1 call, and purchase 100 shares of the underlying; is there a name for doing this without purchasing the 100 shares?
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1answer
72 views
Benefits of systematically trading OTC options instead of exchange-traded options
Is there a case to trade liquid OTC options (FX, single-name equity, swaptions, etc.) instead of exchange-traded index options in a systematic strategy?
2
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1answer
122 views
4 Leg Synthetic Stock Options Strategy
Traditionally, a synthetic stock option involves buying a call and writing a put at the same strike price. I recently encountered an ETF prospectus that claims to achieve this exposure with a four leg ...
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2answers
213 views
What is the strategy for this piece of information
Heavy Math background, very light finance background:
Suppose I have a stock $S$ whose price is measured by the market once on times $t_0$ $t_1$ $t_2$.
Now the market has some opinion for how the ...
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2answers
76 views
Pricing options with 0 or negative underlying values
I am trying to calculate the value of an option whose underlying is the calendar spread between two months for a commodity (front month Brent vs 2nd month), usually known as a calendar spread option.
...
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1answer
160 views
Upper bound option price in volatility dimension
All,
I have a theoretical question about the value of an option when spot price goes to infinity as a function of volatility going to infinity.
I know that for a call option:
The option value ...
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2answers
3k views
Gamma Pnl vs Vega Pnl
Why does Gamma Pnl have exposure to realised volatility, but Vega Pnl only has exposure to implied volatility? I am confused as to why gamma pnl is affected (more) by IV and why vega pnl isnt affected ...
2
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2answers
4k views
Funded equity collars and margin loans
There is an article in the Financial Times today concerning equity funded collars [1]. The equity collar structure is used by a counterparty $A$ which wants to build up a position in a stock $S_t$. ...
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1answer
59 views
varswap replication doubt
I have a doubt regarding the varswap replication- I know the portfolio of options with proper weights is a static one, and that there is a dynamic position required in underlying. My confusion is ...
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2answers
458 views
Stop-loss start-gain paradox: Why is it a 'paradox'?
The Stop-Loss Start-Gain Paradox and Option Valuation: A New Decomposition into Intrinsic and Time Value, by Peter P. Carr and Robert A. Jarrow, in The Review of Financial Studies, Volume 3, Issue 3, ...
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0answers
215 views
Higher Order Greeks
In studying options pricing a while back, I had learned of the higher order sensitivities of of Speed and Color.
Speed was the rate at which the gamma changes with the underlying.
Color is a ...
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1answer
602 views
Replicate a Portfolio with Given Payoff
Looking for a convincing general strategy [not trial and error] to solve these kind of questions:
Any help will be super helpful!
Thanks a bunch!
Replicate a portfolio on an underlying asset $S$ ...
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3answers
2k views
What really is Gamma scalping?
How does Gamma scalping really work? It seems there is no true profit scalped. If we look at the simplest scenario, Black-Scholes option price $V(t,S)$ at time $t$ and the underlying stock price at $S$...
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1answer
295 views
Arbitrage strategies in Rubinstein's binomial tree one-step
Suppose that the current stock price is $S_0=20$ and the call option price with no arbitrage is $c=0.633$. Knowing that the expiry stock price can be $S_T=22$ with call option price $1$ or $S_T=18$ ...
3
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1answer
581 views
How to understand the no call or put spread arbitrage condition
The book Advanced Equity Derivatives Volatility and Correlation page 22 said
To preclude arbitrage we must at least require:
...
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2answers
213 views
Positive PnL with long volatility strategy
Suppose I was interested in longing volatility. Suppose I bought a long straddle today which expires in 3 months. Suppose that volatility was very high in those 3 months, however, the stock expires at ...
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1answer
386 views
Build a Synthetic Loan for Personal Finance
Suppose I am short of cash and want a loan for some mundane objective like travelling or buying a car. The interest rate for personal loan with my bank is too high.
Is there any way in finance that ...
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0answers
573 views
Rationale behind volatility dispersion (or correlation) trading
When looking at the explanation of CBOE S&P 500 Implied Correlation Indices available here, it is written that such indices:
[...] "may be used to provide trading signals for a strategy known as ...
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0answers
533 views
Delta hedging vs Strangle
Long volatility delta hedging and strangle are common long volatility strategies. We can make strangle delta neutral(in $) by buying more puts than calls(if an absolute value of put delta is less than ...
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3answers
403 views
Tracking error Black Scholes
Suppose an asset follows the SDE
$$ d S_{t}^{1} = \mu S_{t}^{1} dt + \sigma_{t} S_{t}^{1} d W_{t} $$
Furthermore assume that $r = 0$ and a trader who uses Black-Scholes for pricing and hedging with ...
2
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0answers
325 views
Trading strategies for increased realized volatility
Suppose once every 2-3 weeks I have a way to select a few equities that are likely to exhibit higher realized volatility in the future month (relative to the past month). Historically, the average ...
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0answers
112 views
When to expect profitability of a call options buying strategy
When could we expect consistent profitability of a call options buying strategy given specific statistical assumptions about X% chance of a stock price moving up by Y% within 1-5 days (or Z number of ...
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1answer
88 views
What instruments help me receive a premium?
Apart from selling options , what other instruments can I trade(sell) to collect a premium ? The main problem that I face is as follows :
I am buying a Call option which I would like to fund by ...
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1answer
106 views
To Collar or not to Collar
I have a conundrum.
I have a stock that has had considerable price appreciation over the past year. Well over 100%. I no longer see any factor (or fundamentals) supporting it's current price (in the ...
2
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1answer
527 views
How to approximate the Carr-Madan decomposition formula?
I have came across the excellent answer.
I'm looking for a dicrete approximation of the Carr-Madan decomposition formula of the function $f(F_T)$ of the terminal futures price by taking a static ...
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1answer
73 views
Is it possible to calculate the call-put parity for an option's portfolio?
Let's say I have designed an option's portfolio. The portfolio includes long as well as short positions in European-style put and call contracts based on the same underlying asset with different ...
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1answer
93 views
How to calculate ROI on a net credit option transaction?
If I have an option that has a net credit and results in a positive expected value (based on my own estimates of volatility), how do I calculate an ROI in order to compare with a net debit credit ...
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1answer
120 views
Time Value of Option
I am working on time value of option, and especially with dividend, and I have the following questions.
First if the consider the Black Scholes models with no dividends and free interest rate $r = 0$
...
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1answer
963 views
Implementation of an option tail-hedging strategy
This question directly refers to the paper "Capital Asset Pricing Mistakes: The Consistent Opportunities in Tail Hedged Equities", http://www.universa.net/Universa_SpitznagelResearch_201501.pdf.
Very ...
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1answer
815 views
How to apply Kelly criterion to a portfolio made by a stock plus a option?
First of all, assuming a Gaussian, Markowitz, well behaved world. Extensions for non-well behaved world will be welcomed.
I know that by a portfolio made by only by one stock (and a risk free bond) I ...
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1answer
204 views
Portfolio with zero or negative initial cost
Let's say I have formulated an integer linear programming (ILP) problem with the objective function $$F(X)=V(T,X)-C(t,X),$$ where $V(T,X)$ is the payoff of portfolio, and $C(t,X)$ is the initial cost ...
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3answers
172 views
What does it mean for an option strategy to be leveraged
Probably a newbie question, but what do traders mean when they say that an option strategy is leveraged ? And when can we say that it is the case ?
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1answer
169 views
Relations between Call and Put
I am trying to solve a question in finance but I am pretty much stuck and would need your help :)
Suppose you know the following information about a market:
Future is at 66
70 strike straddle is ...
