Questions tagged [option-strategies]

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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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0answers
49 views

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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1answer
1k 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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0answers
58 views

Probability of touching a short strike

Assume we setup a short strangle: current stock price at 20, put strike at 15(-0.30 delta) and call strike at 25(+0.30 delta). How do I calculate the implied probability of the stock to touch 15 first(...
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0answers
67 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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13answers
66k views

Are there any good tools for back testing options strategies?

There are all kinds of tools for backtesting linear instruments (like stocks or stock indices). It is a completely different story when it comes to option strategies. Most of the tools used are ...
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0answers
877 views

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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1answer
966 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 ...
2
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0answers
75 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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1answer
67 views

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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1answer
63 views

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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5answers
1k views

delta hedging strategy for OTM option

Wondering how you would think about the following thought experiment - suppose you sell an OTM call option and plan to implement a delta hedging strategy whereby if the price of the stock were to ...
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2answers
100 views

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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0answers
79 views

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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2answers
435 views

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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2answers
3k views

How to calculate the most realistic historical option prices with additional publicly available parameters

This is a follow up question of this one. My aim is to create the most realistic historical option prices possible with publicly available data. I want to do this for backtesting purposes. The ...
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0answers
113 views

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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3answers
7k views

Papers about backtesting option trading strategies

I am looking for all kinds of research concerning option trading strategies. With that I mean papers that publish results on different option trading strategies properly backtested with real-world ...
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0answers
66 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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2answers
231 views

Calendar spread: What are the worst cases?

I am looking to solely make use of the theta decay and trying to overcome the effects of delta and Vega. ​​If, I sell ABC Feb OTM (strike price X) with 3 x 10 = Rs. 30 credit and buy ABC Mar OTM (...
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0answers
97 views

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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0answers
45 views

Options probability of profit

I’m trying to determine if there’s a simple way to determine the probability of profit of options and by extension different options strategies. The closest I’ve found to “plug and chug” type formulas ...
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2answers
207 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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0answers
49 views

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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1answer
144 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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1answer
82 views

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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0answers
37 views

How does Intrinsic and Time Premium factor into deep ITM options for leveraged securities

So I'm curious about the downside risk on this trade. Some backstory - I noticed the options chain for TZA had basically no volume or open interest for deep ITM calls about a week ago while also ...
2
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1answer
52 views

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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1answer
891 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 ...
2
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1answer
73 views

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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0answers
17 views

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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2answers
2k 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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4answers
649 views

Implied volatility of a complex options position

Assume I have a "complex" options position like a straddle, strangle, or iron condor. In other words, several options traded together as a single position against one underlying asset (not a basket ...
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1answer
79 views

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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1answer
131 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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2answers
345 views

Analysis of Unbalanced Covered Calls

Hello I am doing an analysis on covered calls with and extra amount of naked calls. Ignore the symbol and current macroeconomic events. I couldn't find any reference to this strategy (unbalanced is ...
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1answer
79 views

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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1answer
70 views

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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1answer
315 views

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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2answers
156 views

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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1answer
82 views

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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0answers
88 views

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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0answers
150 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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2answers
87 views

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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2answers
15k 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 ...
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1answer
63 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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6answers
477 views

What is the benefit of holding a short option?

I am new to corporate finance and I ask myself why an investor is interested in being short an option? He can only can win a premium but he can lose much more. I understand with being a short, I cap ...
2
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1answer
65 views

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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1answer
102 views

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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1answer
909 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 ...