Questions tagged [option-strategies]

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0answers
62 views

How to price a put option on a multi-asset fund? Confused by risk-neutral pricing implicaton on real world

The fund has super track record with stable vol. The chance for this Put to pay out is very low in real world, but a B/S risk-neutral pricing would give a very high cost. I am struggling with the ...
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35 views

Selecting strike prices for put-writing strategy based on Z-scores

I'm trying to replicate the put-writing strategy of Jurek and Stafford from 2015 (The Cost of Capital for Alternative Investments, Jrl. Fin. SSRN). Their strategy writes index put options on the SP500,...
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1answer
62 views

Is it possible to use options to increase the yield of a dividend paying stock?

I was wondering if it is possible to use call options (selling call options) to increase the yield of a dividend-paying stock (that I already own) by 1-2 percent per year? What are the cons of this ...
7
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1answer
530 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
71 views

Hedging delta when gamma is positive

If I have an aggregate position with a positive gamma, should I still be delta neutral? I feel like I'm giving up the positive benefits of being gamma positive because I'm killing my delta constantly.
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1answer
146 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 ...
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0answers
44 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 ...
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0answers
65 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 ...
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2answers
325 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
35 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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49 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
61 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 ...
4
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1answer
598 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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1answer
227 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 ...
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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 ...
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0answers
26 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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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 $S$...
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0answers
35 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 $...
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2answers
96 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
61 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
53 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
67 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
732 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 ...
2
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1answer
113 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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0answers
239 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
117 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
134 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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0answers
61 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 ...
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2answers
143 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
87 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 ...
2
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3answers
516 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 ...
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1answer
642 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
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0answers
176 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
278 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 ...
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1answer
665 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
63 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
82 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
129 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
232 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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1answer
218 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
6k 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 ...
1
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1answer
428 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 $S_T=18$ ...
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1answer
66 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
6k 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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2answers
565 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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3answers
7k views

Are there comprehensive analyses of theta decay in weekly options?

Are there comprehensive analyses of how much theta a weekly options loses in a day, per day? I know what the shape of theta decay looks like, in theory, where the decay towards zero happens more ...
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6answers
5k views

Is it possible to use a series of option prices to predict the most likely path of an asset?

I've always wondered about this. If you have a series of options, with the expires spaced let's say one week between them, and you search for each expiration date the option with the smallest premium,...
3
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1answer
848 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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1answer
692 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
269 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 ...