Questions tagged [option-strategies]

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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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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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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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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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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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4 votes
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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 ...
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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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3 votes
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131 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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2 votes
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92 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 ...
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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
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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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Are there trades that long gamma (convexity) and short volatility at the same time?

Likewise, are there trades that short gamma and long volatility at the same time? Under fixed income context, are there trades that short convexity and long volatility at the same time?
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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 ...
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118 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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263 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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2 votes
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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 ...
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2 votes
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419 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 ...
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137 views

Risks Associated with Option Arbitrage Portfolio

If my math is correct, if I construct the following portfolio of options the worst that I can do regardless of what the underlying does is profit $1.74 (less commissions). Is this correct? Are there ...
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why many option contract price less than minimum boundary price?

I downloaded data from NSE(National Stock Exchange) website regarding closing price of European Call Option written on Index. From standard textbook, I read that option contract must satisfy $C(t) \...
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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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127 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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1 vote
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164 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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1 vote
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64 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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1 vote
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126 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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1 vote
0 answers
87 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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1 vote
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64 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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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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1 vote
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148 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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1 vote
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153 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 ...
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1 vote
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286 views

Computation of option vega under CEV

It is easy to define the option vega $\nu=\frac{\partial C}{\partial \sigma}$ under Black Scholes model since volatility is a single quantity. However, under CEV or local volaility model, it is ...
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1 vote
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131 views

Binary options and European option is similar?

European options and binary (digital) options is similar? How apply the Black & Scholes formula on binary option?
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1 vote
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497 views

Call options portfolio: what would the underlyings' moments to be maximized?

Let you have only three underlyings, like SPY, TLT and GLD, and you want to buy $n_{1}$ Call options on SPY, $n_{2}$ Call options on TLT and $n_{3}$ Call options on GLD... with a limited budget, that ...
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103 views

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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34 views

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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36 views

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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35 views

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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0 votes
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21 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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330 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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334 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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0 votes
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249 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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0 votes
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277 views

Discrete Hedging of Options

Assume that a stock $S_t$ follows simple geometric Brownian motion. Let's say we sold option whose payoff is $f(S_T)$. Now, we are only allowed to trade 2 times in the interval [0,T]. What kind of ...
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-2 votes
1 answer
86 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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