Questions tagged [option-strategies]
The option-strategies tag has no usage guidance.
121
questions
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1answer
88 views
Effective gamma/vega hedging
I want an options position where I can short some options to pocket the premiums and benefit from the time decay. I also want to be vega and gamma neutral.
Is there an established way to find which ...
0
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0answers
37 views
Hedging option delta
Let's say I am long 1000 50 delta call options. I need to hedge my deltas now. There can be infinite ways to do this. How should I think about proceeding wit this? My first thought was, if the ...
0
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0answers
50 views
construction of 25 delta butterfly
Could anyone explain why the 25-delta butterfly strategy is constructed by 0.5*(25-delta call + 25-delta put) - ATM straddle?
Especially, what the term "25-delta" represents in "25-delta butterfly ...
0
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1answer
33 views
Are the price of vanilla bull/bear spread constructed by calls and puts same?
We know that both bull and bear can be constructed by either two calls or two puts. Say if given two strikes, will price of bull call equal to price of bull put?
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44 views
Option arbitrage on two correlated or cointegrated underlying assets
If two indices are highly cointegrated, does it allow for some set of statistical arbitrage strategies for european options for which those indices are single underlyings ?
Does answer change if ...
2
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0answers
57 views
Banks' use of written interest rate options
I study US commercial banks data. I look at the notional amounts of their different OTC interest rate derivatives for the recent years. When I look at non-dealer banks (i.e. end-users), I find that ...
0
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1answer
109 views
How do we calculate option payoff before expiration?
I am trying to simulate a bull spread option
and I have used an online tutorial to calculate payoff at expiry but I am having difficulty simulating the payoff ...
0
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1answer
57 views
Really simple question regarding options. (Amateur level) [closed]
I'm just starting to educate myself on trading and financial instruments and I have what to me seems like a somewhat stupid question but I'd like to pose it nontheless.
If I have an option to sell ...
0
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0answers
24 views
Arbitrage price and American option
I'm studying American Options. If I have $X=(X_n)$ an American option, it is not possible to determine a self-financing predictable strategy ($\alpha, \beta$) that replicates the option in sense that $...
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0answers
34 views
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 $...
0
votes
2answers
93 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 ...
2
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0answers
57 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 ...
0
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0answers
41 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 ...
0
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1answer
66 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 ...
3
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1answer
537 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 ...
1
vote
1answer
90 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 ...
0
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0answers
124 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 ...
1
vote
1answer
112 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 ...
1
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0answers
46 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 ...
3
votes
2answers
222 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-...
1
vote
1answer
74 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 ...
7
votes
1answer
545 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-...
2
votes
0answers
165 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 ...
0
votes
2answers
213 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
votes
1answer
565 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. ...
5
votes
1answer
432 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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votes
1answer
59 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?
1
vote
1answer
81 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
votes
1answer
127 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 ...
5
votes
2answers
224 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 ...
1
vote
2answers
117 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.
...
1
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1answer
196 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 ...
6
votes
2answers
5k 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
votes
2answers
5k 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 $S_t$. ...
0
votes
1answer
63 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 ...
7
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2answers
522 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, ...
4
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0answers
230 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 ...
3
votes
1answer
762 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 $S$ ...
8
votes
3answers
3k 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 $S$...
1
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1answer
373 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
641 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
242 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 ...
4
votes
1answer
514 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 ...
3
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0answers
620 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 ...
2
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0answers
646 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 ...
2
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3answers
472 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
350 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
121 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 ...
2
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1answer
90 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 ...
0
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1answer
111 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 ...
