Questions tagged [option-strategies]

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Which is more Appropriate way to calculate Leverage with Options Contracts? [closed]

the connecting of words and bold colors was because of something here in the posting feature, it would not let me take it away when originally posted. i have re-copied and tried correct those errors. ...
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1 vote
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Why should delta-neutral backspread always result in credit?

Natenberg mentions in chapter titled "Volatility Spreads" : under the assumptions of a traditional theoretical pricing model, a delta-neutral ratio spread where more options are purchased ...
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What are some good books to get started with option theory? [duplicate]

Recently graduated in econometrics but starting to realize my knowledge is limited. Any and all tips are welcome!
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Systematic trading strategies - Selling 1M Straddle

I am trying to compute the daily P&L of the following systematic trading strategy: sell each day a 1M straddle on EUR-USD from 04th January, 1999 to today. My dataset contains the strike, the spot,...
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Option Chain Simulator Using Historical Index Future data, VIX, Implied volatility for Calculation ( Pls Review the Idea & give your suggestions )

Recently I started trading in options, for Learning purpose I am Planning to Create old European Option chain like previous week or last year particular entire week Weekly expire option chain with the ...
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Best way to find the spot vol covariance and vol of vol implied by the smile?

I am looking for some common ways to find the spot vol covariance and the vol of vol implied by the option smile. The purpose is to them compare this to realizations -> ie, to compare implied vs ...
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Portfolio optimization and decorrelating short term option payoffs

I'm looking to analyse whether one is better off selling OTM weekly covered calls, and rolling them, compared to selling monthly covered calls. There are some expectations on the yield so I cannot go ...
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2 votes
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Risk-managing vanilla books (sell-side)

I am interested in learning more about how traders risk-manage books of vanilla options. I presume there should be a fairly standard list of facts. For the moment, the area of interest is FX, as ...
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1 vote
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Using delta as probability of an option expiring in the money

I understand that delta can be seen as a probability proxy for an option expiring in the money, as well as deltas for call options ranging from 0 to 1 and deltas for put options ranging from 0 to -1. ...
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3 votes
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444 views

What is a skew swap?

I'm watching a video where hedge fund manager Cem Karsan describes the basics of his strategy as a "skew swap". I understand that he's buying/selling index options at different maturities to ...
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2 votes
1 answer
366 views

Delta hedge swaption straddle

Let's say you decide to buy a 2Y10Y ATM swaption straddle (i.e. buy 10 million ATM payer swaption and buy 10 million ATM receiver swaption). In order to delta hedge, I believe you would short the ...
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-2 votes
1 answer
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Why does bull call spread shows higher payoff than bull put spread?

I am trying to compare bull call spread and bull put spread for equity index option. For the options where the put call parity holds, I am getting a different payoff for bull call spread and bull put ...
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Best/worst case scenario after selling OTM call option

You decide to sell a European call option that is currently 10% OTM (for example the strike = 100 and the current price = 90). You have to delta hedge to keep the delta of your position at 0. What is ...
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3 votes
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How to backtest multilegged options strategies?

I have got historical data for the index options. Now I am looking at backtesting some of my strategies with this historical data. I would like to backtest strategies like selling a straddle and ...
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4 votes
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Finding optimal calendar spreads and diagonals

I am looking for some pointers on risk/return profiles of calendar spreads and diagonals with different strikes and expiration dates, preferably based on historical backtests with SPY options. Please ...
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1 answer
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On P and L of backspread

Does anyone know how the P and L on put backspread changes as a function of implied volatility and longer expiration? One wants as much gamma as possible as far as I understand, in turn being related ...
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2 votes
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192 views

Breeden and Litzenberger formula for pricing state-contingent claims

I am reading these two papers Prices of State-Contingent Claims Implicit in Option Prices and Implied Risk-Neutral Distribution: A Comparison of Estimation Methods. I understand how we get the formula ...
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Valuing Option Credit Spreads

I'm trying to come up with a metric to value and compare spreads. One way that I was doing this was to compute the Expected Value of the spread. To calculate the expected value I used the following ...
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1 vote
2 answers
256 views

What is this option strategy called?

I have been playing with option strategies in order to understand the advantages/drawbacks of all of them. Then I realized this type of strategy is not so advertised in the web and cannot find any &...
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What's a sensible way to measure correlation in the volatility surface?

Lets say I construct a parametrisation of the volatility surface that lets me infer dynamics i.e correlation between strike vol. Is computing the sample correlation (after controlling for spot-vol ...
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1 answer
226 views

Barrier Reverse Convertible

I am a finance student and during my free time I try to understand more financial products. Today I have found a term sheet for a specific type of barrier reverse convertible but I couldn't understand ...
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1 answer
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What kind of stock's prices are most affected by option trading?

Option trading translates into stock trading via market maker hedging. For instance, if I buy a call option, the market maker will have to buy the stock to delta hedge. Thus, this should translate ...
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2 votes
1 answer
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How to find the price variance of an infinitely expanding Binomial Tree?

How to find the price variance of an asset in a Binomial Tree Model? Suppose the price of the Stock is $S_t$ at time $t$ and it has a probability of $p$ that will go up $u$ times to $u \cdot S_t$ and ...
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1 vote
1 answer
959 views

Would it be possible to combine long butterfly with long straddle, achieving profit no matter the outcome?

This has been bugging me for a while, I feel like I'm missing something. Simply put, a long butterfly will make profit if the price at maturity does not change much, as shown below A long straddle is ...
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Determine if max profit/loss on group of option legs is unlimited

Say you have a group of option legs for a symbol either for a strategy like a vertical spread or maybe an iron condor. Each with different strikes, expiration dates, etc. Without identifying the type ...
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1 answer
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Pairs trading on two options or option and underlying?

I have been looking into pairs trading strategies (stationary linear combination of multiple securities) for options. Multiple related options or option and underlying over small periods of time such ...
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1 vote
1 answer
217 views

Call spread hedge

I'm trying to understand how a call spread is used for FX hedging. The example that my book gives is when we have USD receivables in 12 months which we want to convert to EUR and we want to hedge ...
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Strategic Asset Allocation and Multi-Asset Class Option Based Tail Risk Hedging

If a Strategic Asset Allocation is defined as an asset allocation to weather all investment environments and one which should be employed in the absence of any market views, it would appear that the ...
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1 answer
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Managing/Hedging strangle with futures at strike prices

Since I am very new to options, I thought would be great to ask the opinions of the experts in this group. Please note that I will hold strangles till expiration. The goal is to sell strangles (OTM ...
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2 answers
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Option seller: Why is delta hedging required if I am long/short the underlying with same number of lots as the OTM options I sold?

Situation: Sold OTM call while long the underlying. Stock did not tank, it went up too much breaching the breakeven point (strike price+premium). If I sell 1 lot of call options and I am being long ...
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2 answers
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Why are there so many S&P 500 call options selling with strike @1000?

I am analysing option-implied RNDs and risk preferences for my masters thesis, so forgive me if I sound like a beginner in derivatives. I use WRDS to download my historic options data. I am looking at ...
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5 votes
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How to implement an “Active Long Volatility” Strategy?

The research paper "The Allegory of the Hawk and Serpent" describes an asset allocation referred to as the "Dragon" Portfolio, which allocates 18% to "active long volatility&...
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Option Based Portfolio Insurance OPBI Simulation Excel

I want to simulate an example of OBPI in Excel. I can't find any example online with random figures that show how to simulate it. I tried to understand the appendix of Perold (1995): Dynamic ...
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4 votes
0 answers
185 views

What put options would the Universa Tail Fund have bought?

According to this Bloomberg article, Universa was up 3,600% in March 2020, by hedging with extremely out-of-the-money puts: https://www.bloomberg.com/news/articles/2020-04-08/taleb-advised-universa-...
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-2 votes
1 answer
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How Are Option Model Assumptions Justified In Practice

I am reading this article, and I am wondering how comments like there may be a 50/50 chance that the underlying asset price can increase or decrease by 30 percent in one period. are reconciled with ...
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2 answers
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Why are these deep in-the-money FLEX options seemingly bought at a discount?

98% of the initial reference value is .98 x 267.88 dollars, which equals 262.52 dollars. However, the market value of each call contract they purchase is 247.42 dollars. How are they purchasing these ...
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1 answer
102 views

Calculate borrow/loan or repo rate

I was given this question on interview and couldn't find an answer in time (it is a software developer job in a place that deals with options). Can someone explain how to do this or point me to a good ...
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2 votes
1 answer
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Confusion about optimal choices with exotic options

With exotic options, holders usually face choices at certain times. In my understanding, the price of the option is determined by assuming the optimal choice is taken and computing the discounted ...
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2 votes
1 answer
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Is there a sound logic for buying a portfolio of call options in the same ratio as you would buy the underlying shares?

Suppose I believe it would be profitable to build an investment portfolio by investing, say, USD 30,000 in stocks in the following ratio: 30% in shares of CompanyA, 30% in CompanyB and 40% in CompanyC....
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2 votes
1 answer
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Calculating a Covered Call Strike with N% Probability that Shares Won't be Called Away

I'm starting to experiment with covered call strategies, and I'm trying to find the right strike price to sell for my covered calls such that I can maximize premium while being generally "...
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-2 votes
1 answer
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Optimal Covered Call Strategy [closed]

How do I compute the optimal strike / expiry / when to close or roll for a covered call strategy on a highly liquid underlying (e.g. SPY)?
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3 votes
1 answer
1k views

Simple strategies for tail risk hedging that retail investors can use

Universa Investments run by Mark Spitznagel popularized the idea of portfolio insurance (also known as tail hedge) protecting the investor against severe market declines (tail risks). By using this ...
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1 vote
3 answers
84 views

Equivalent combination of puts

Suppose that a certain stock is currently worth $S_0=\$61$. Consider an investor that buys one call with a strike price equal to $K_1=\$55$, that costs $c_1=\$10$, buys another call with strike price ...
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0 votes
1 answer
231 views

What are an option's "tested" and "untested" sides? [closed]

What does 2 below mean? Adjust what once? What do tested and untested side mean? teamspritemini. 2 points 3 years ago My preference is as follows: If Naked, 3X premium as stop ...
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0 votes
1 answer
67 views

What does buying back a "short strike" for .05 mean?

What does the red phrase below mean? doougle. 7 points 3 years ago. This is one of the "not as easy as it sounds" things about options. You always hear things like "Make money if the ...
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0 votes
1 answer
141 views

Active vol strategy within a portfolio

Suppose I'd like to have 10 % of my portfolio allocated to "long volatility" by rolling straddles . Obviously going all in on one trade implies significant risk of losing all the money. Does anyone ...
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0 votes
1 answer
1k views

How to normalise options? Normalise strike price, premium, tenors

I would like to normalise options, to being able to compare it. Make price of underlying symbol = 1, have same tenors, and same step for the strike price. 1) Use 1 as stock_price and scale ...
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0 votes
1 answer
167 views

Double Call Option

A double call option allows the holder to either exercise at time $T_{1}$ or time $T_{2}$, where $T_{2}$>$T_{1}$. With corresponding strike prices $K_{1}$ and $K_{2}$, it can be shown that it is never ...
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4 votes
1 answer
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How to model/price the risk of Covid-19 and other pandemics

How would you model and price the risk of Covid-19 pandemic? These large cost low probability events with very little history seems to pose a particular challenge when quantitatively modeling and ...
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0 votes
1 answer
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Calculate 6 month- return for an investment [closed]

Assume that the price of DF stock went from a price of $104 on March 2 to 146 on April 1. With a current stock price of 146, Invest all of your amount 14,600 in the DF stock (buy 100 shares) ...
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