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Questions tagged [option-strategies]

The tag has no usage guidance.

6
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1answer
192 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
1answer
58 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
votes
1answer
130 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
50 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 ...
4
votes
0answers
202 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 ...
1
vote
1answer
105 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 ...
0
votes
0answers
91 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 ...
2
votes
0answers
84 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
0answers
32 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 ...
1
vote
2answers
63 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
vote
1answer
36 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
votes
3answers
376 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 ...
6
votes
1answer
308 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-...
1
vote
0answers
126 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
104 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
315 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. ...
-2
votes
1answer
56 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
72 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
121 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
209 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
1answer
139 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 ...
5
votes
2answers
2k 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
vote
1answer
265 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 $S_T=18$ ...
0
votes
1answer
58 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 ...
3
votes
2answers
3k 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
0answers
71 views

Arbitrage opportunity with call options? [duplicate]

Call options with strikes 100, 120, and 130 on the same underlying asset and with the same maturity are trading for 8, 5, and 3, respectively (there is no bid-ask spread). Is there an arbitrage ...
7
votes
2answers
401 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, ...
11
votes
3answers
5k 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 ...
14
votes
6answers
4k 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,...
6
votes
3answers
2k 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
vote
1answer
500 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 $S$ ...
4
votes
1answer
356 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
votes
1answer
553 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: ...
-1
votes
2answers
200 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 ...
29
votes
10answers
31k 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 ...
3
votes
0answers
550 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
votes
0answers
496 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 ...
0
votes
1answer
92 views

How to calculate ROI on a net credit option transaction?

If I have an option that has a net credit and results in a positive expected value (based on my own estimates of volatility), how do I calculate an ROI in order to compare with a net debit credit ...
2
votes
0answers
319 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 ...
1
vote
0answers
107 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 ...
1
vote
5answers
656 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 ...
1
vote
1answer
88 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 ...
5
votes
1answer
271 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 ...
4
votes
1answer
2k views

How to hedge a bull call spread

I am trying to make a theoretical hedge to a bull call spread. (buy out the money call, sell further out the money call) What I have now is almost effective but there is one possible 80% loss (...
8
votes
1answer
10k views

Call option arbitrage opportunity

I am having trouble wrapping my head around some text provided to us by our lecturer (unfortunately he is currently unavailable). If we let $c$ be the price of a European call option, $S_0$ the ...
3
votes
1answer
776 views

How to apply Kelly criterion to a portfolio made by a stock plus a option?

First of all, assuming a Gaussian, Markowitz, well behaved world. Extensions for non-well behaved world will be welcomed. I know that by a portfolio made by only by one stock (and a risk free bond) I ...
0
votes
1answer
104 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 ...
0
votes
1answer
280 views

How to use Black-Scholes' formula for a butterfly option?

I'm wondering if I can apply Black-Scholes formula to value a butterfly option, i.e: $$B(T)=V_\text{call}(S(T)-K,0)+V_\text{call}(S(T)-K',0)-2V_\text{call}(S(T)-K'',0)$$ with $K<K''<K'$, just ...
2
votes
2answers
4k views

Why a calendar spread is a preferred strategy in a low volatility period

What is it about a calendar spreads opposed to other spreads (e.g vertical spread) that makes it such a popular strategy for a period of low implied volatility? Is it that when low volatility turns ...
3
votes
1answer
509 views

How to approximate the Carr-Madan decomposition formula?

I have came across the excellent answer. I'm looking for a dicrete approximation of the Carr-Madan decomposition formula of the function $f(F_T)$ of the terminal futures price by taking a static ...