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24 views

Approximation of an Autocall (trigger 100%) with ATM options prices

thank you very much for trying to answer this question, and I hope it will be helpful to everyone in my situation. I am preparing for an interview, and I've come across these three questions on the ...
1 vote
1 answer
129 views

P/L table for a delta hedged position

I am trying to replicate the table at pag. 119 of Dynamic Hedging by N. Taleb with no success. In the example called "A misleading delta" an operator has the following position: long \$1 ...
13 votes
1 answer
2k 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 ...
0 votes
2 answers
179 views

How to conclude which option is overpriced (by using implied volatility)

I have a small question regarding how to conclude which option is more overpriced? See the following table Option Theoretical Value Option Price Option Implied Volatility 7.00 8.00 26% 6.00 6.75 28%...
0 votes
1 answer
155 views

PnL of a delta-hedged straddle

On Twitter, this question has been making the rounds: If you sold a 30 vol for a one year out at the money straddle, have access to free, perfect, and continuous delta hedging, and stock realizes a ...
0 votes
0 answers
18 views

Setting Bid-ask for option forward-type strips

do you know if there is any methodology on how to define spreads when fx option market maker is trying to quote for exaple various fx forward strip strategies? From bbg ovml or software which we are ...
2 votes
1 answer
70 views

Reverse convertible coupon determination

I had a question about the coupon level determination for a simple reverse convertible product. Assuming risk free rates are 4% while premium on short put is 5%, typical text-books would then quote ...
2 votes
1 answer
1k 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 ...
1 vote
0 answers
64 views

We can forecast the direction of (constant maturity) implied vol of various indices well. Is that useful?

We've been financial building ML models for years, and have multiple portfolios live - but we're new to the volatility space, none of us are options traders. How could we effectively use implied vol ...
2 votes
0 answers
143 views

Do options/prop trading firms put any effort into predicting (the direction of (implied)) volatility?

What are the "best practice" models that quant firm that trades options would use to "predict" (let's say SP500) implied vol, that they integrate into their decision making? Do ...
47 votes
13 answers
80k 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 ...
16 votes
3 answers
11k 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 $S$...
0 votes
2 answers
120 views

Constructing payoff with options

Suppose that COMPANY A has issued a special bond that does not pay any coupons. At maturity T, the bondholder receives the principal (face value) equal to 1,000 plus an additional ...
0 votes
0 answers
62 views

Why a Short Iron condor payoff is showing always positive

I created a Short Iron condor on Nifty 50 index European option for 9 Nov weekly expiry on 1 Nov morning 10.30 AM (live market). It's payoff is showing always positive curve. Why ? However when same ...
0 votes
0 answers
73 views

A naive approach to choose a strike

The idea is to choose a strike base on the premium and historical data to have maximum profit. For example a selling a (European) call. $$Profit = Premium_K - (S(t) -K)^+$$ Replacing $(S(t) -K)^+$ for ...
4 votes
3 answers
3k 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 $S$ ...
0 votes
0 answers
89 views

What would be the practitioner way of hedging jump risks?

I have developed a keen interest in volatility strategies and have implemented various approaches based on practitioner delta. This delta is meticulously calibrated using a no-arbitrage implied ...
1 vote
0 answers
81 views

Arbitrage between gamma and delta on smaller timescale in options selling

I have observed that sometimes (mostly for OTM options) near expiration, an increase in option price cannot be fully explained by delta and theta(given volatility is constant). The gamma spiked the ...
0 votes
1 answer
233 views

At what threshold on delta percentage should I hedge my option portfolio?

I am able to identify and build an option portfolio with long/short call/put options across different strikes and expiries such that the gamma is positive and cost is negative. Upon inception I hedge ...
3 votes
3 answers
2k 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 ...
0 votes
0 answers
37 views

Accounting of a stock put option for Monthly % Changes

am looking to backtest a strategy of systemic put buying on an equity index (e.g SPX Index) so say a strategy of buying 1Y 90% SPX Puts rolled 1 day prior to expiry. As opposed to only calculating the ...
3 votes
3 answers
13k 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 $S_t$. ...
6 votes
2 answers
3k views

What is gamma to do with realized volatility?

I keep hearing that gamma is a bet on realized volatility. That is, if we are long gamma then we need higher realized volatility to come in the future in order to make a profit. from other source: If ...
0 votes
0 answers
91 views

Options strategy expiration probability

Big picture For any options strategy, for any segment between zero profit (breakeven) points, I want to calculate probabilities of the underlying instrument price will be within a segment at ...
2 votes
1 answer
407 views

Optimal delta-hedging frequency when gamma scalping

Is there a practical way to calculate a delta threshold for rebalancing when gamma scalping? I know it does not effect expected P&L, but what about optimizing for P&L sharpe ratio after ...
0 votes
0 answers
96 views

Input/References on Generating Exit Signals for Positions that Profit Very Highly from Extreme and "Unpredictable" Events?

For focus, let us restrict the scope of this to vanilla options-based positions/strategies. In a lot of the accounts that I've seen of those that engage in this sort of investment/trading strategy (...
2 votes
0 answers
111 views

question on risk reversal P/L example in Euan Sinclair's book 'positional option trading'

I am reading Euan's book, ‘positional option trading’ and have a question about risk reversal P/L example. Here is description 'Consider a 1-month risk reversal on a \$100 stock. The 20-delta put (91 ...
2 votes
0 answers
39 views

Is there a strategy to increase the granularity of a deep in the money options contract?

My aim to get as close as possible to a "mini" deep in the money options contract. But mini contracts aren't generally available and buying regular 100 packs of high priced stocks is ...
9 votes
2 answers
2k 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. ...
1 vote
1 answer
99 views

In the CRR model, describe the strategy replicating the payoff $X=(S_T-K)^{ +} +a(K-S_{T-2})^{+ }$ for $a \neq 0$ [closed]

In the CRR model, describe the strategy replicating the payoff $X=(S_T-K)^{ +} +a(K-S_{T-2})^{+ }$ for $a \neq 0$ $X$ consists of two parts: European call option with strike price $K$ and expiration ...
5 votes
0 answers
1k 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&...
0 votes
0 answers
80 views

Trading options - risk adjusted return

I have often wondered what kind of risk restrictions do traders of options in Hedge funds have but have not managed to find any information on this matter. I presume there must be some kind of measure ...
36 votes
5 answers
19k views

Skew arbitrage: How can you realize the skewness of the underlying?

It's not clear to me how to realize skewness. In other words, how do you implement skew arbitrage? There seems to be no well-known recipe like in volatility arbitrage. Volatility arbitrage (or vol ...
0 votes
1 answer
435 views

How to simulate a delta hedged option strategy

I'd like to do a montecarlo simulation of a $\Delta$ hedged strategy (long OTM call) to see how the PnL distributes on cases like: $\sigma_{bought} < \sigma_{realized}$ $\sigma_{bought} > \...
0 votes
3 answers
263 views

Are "American" option strategies traded OTC?

Is there such a thing as an American butterfly spread? For a European butterfly spread simply buying 1 put with strike price X+a, 1 put with strike price X-a and shorting 2 calls with strike price X, ...
1 vote
2 answers
1k 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 ...
1 vote
1 answer
305 views

$\mathbb{Q}$ measure and $\mathbb{P}$ measure, trading strategy

I just want to be sure if my thinking is correct and does not have any flaws. Let's define stock as a process $S$ (see the picture below) with real-world measure $\mathbb{P}$, where $p=0.9$ and Bonds ...
1 vote
2 answers
234 views

I can’t understand why the premium of two butterflies with same strike but different broadness are approximately the same

Consider the following premiums of calls option with different strikes. C90 = 57.35 C95 = 52.55 C100 = 47.3 C105 = 42.9 C110 = 38.25 In this case, the butterfly 90-100-110 cost 1 and the 95-100-105 ...
1 vote
0 answers
154 views

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 ...
3 votes
0 answers
199 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 ...
2 votes
0 answers
96 views

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!
20 votes
2 answers
29k 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
0 answers
117 views

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 ...
1 vote
0 answers
465 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. ...
2 votes
0 answers
1k 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 ...
1 vote
1 answer
2k 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 votes
1 answer
79 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 ...
-1 votes
1 answer
188 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 ...
1 vote
5 answers
2k 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 ...
0 votes
2 answers
246 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 ...