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Questions tagged [option-strategies]

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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 ...
vonjd's user avatar
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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 ...
Branson's user avatar
  • 735
26 votes
3 answers
8k 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 ...
vonjd's user avatar
  • 27.5k
21 votes
2 answers
5k views

statistical arbitrage option overlay strategies / volatility trading

Here's an interesting trading puzzle that I would love to get the community's input on. Let's say there exists an alpha signal that does a good job of sorting equities expected excess returns over ...
Ram Ahluwalia's user avatar
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 ...
Trajan's user avatar
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19 votes
2 answers
5k views

How can I learn about the quantitative aspects of market making in illiquid single stock options?

I would like to learn more about the possible ways of doing quantitative research regarding option market making. In particular, while the mainstream index option market may be very liquid, the ...
Soham's user avatar
  • 305
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 $S$...
Hans's user avatar
  • 2,806
16 votes
2 answers
3k views

Can you replicate an option on an arbitrary basket of stocks?

Since a market index is nothing more than a basket of stocks, you can create your own index by putting together stocks of your choice. The only difference is that you can trade options on major ...
Tom Tucker's user avatar
15 votes
6 answers
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,...
Meh's user avatar
  • 1,173
15 votes
2 answers
676 views

Transparent quant products with real track record

A real track record is better than backtesting! I am looking for products, funds, certificates, indices etc. that are based on quantitative trading strategies where the strategies and performance ...
vonjd's user avatar
  • 27.5k
15 votes
3 answers
20k 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 ...
CQM's user avatar
  • 1,862
15 votes
3 answers
2k views

What benchmark/index to use for backtesting a portfolio of stock options?

What benchmark should I use for backtesting a model for when I should buy an option of a particular stock? For equities, one could say their portfolio outperformed the S&P 500. I would like to ...
eWizardII's user avatar
  • 253
13 votes
1 answer
1k views

What mathematical models did Harry Markopolos run to prove that Bernie Madoff 1% a month gain was a Ponzi scheme?

http://www.cbsnews.com/news/the-man-who-figured-out-madoffs-scheme-27-02-2009/ Asked how long it took him to figure out something was wrong, Markopolos said, "It took me five minutes to know that ...
curious's user avatar
  • 1,037
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 ...
Lisa Ann's user avatar
  • 2,133
10 votes
1 answer
2k views

What is the average Sharpe ratio of volatility arbitrage funds?

Where can I get data on performance metrics for volatility arbitrage funds? I am trying to compare the Sharpe ratio of my strategy to those of the major players.
Alan's user avatar
  • 101
10 votes
2 answers
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 ...
vonjd's user avatar
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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. ...
0xFEE1DEAD's user avatar
8 votes
2 answers
1k 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, ...
user avatar
8 votes
1 answer
13k 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 ...
user72180's user avatar
7 votes
4 answers
839 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 ...
strimp099's user avatar
  • 2,106
7 votes
2 answers
1k views

Algorithmical replication of a profit and loss function using different options

I often see questions like "Given this payoff graph (example below), construct a portfolio that replicates it." I want to know if there is an efficient method/algorithm to find the individual pieces ...
wrt's user avatar
  • 73
7 votes
1 answer
2k 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-...
maverik's user avatar
  • 173
7 votes
4 answers
378 views

Shorting an option every day vs shorting only at maturity

Suppose we have 2 strategies : strategy A : every $N$ days, we short a call option with a time-to-maturity of $N$ days; strategy B : every day, we short $\frac{1}{N}$ of a call option with a time-to-...
BS.'s user avatar
  • 165
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 ...
dopller's user avatar
  • 173
6 votes
2 answers
6k 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 ...
Victor123's user avatar
  • 1,404
6 votes
2 answers
1k views

How to trade leveraged ETFs

Leveraged ETFs (LETFs) are known to lose value over time due to the "volatility decay" effect. What're the most common strategies for trading LETFs to take advantage of this volatility effect? Also, ...
T. Reuter's user avatar
6 votes
2 answers
321 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 ...
Sidharth Ghoshal's user avatar
5 votes
1 answer
2k 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: ...
A.Oreo's user avatar
  • 1,243
5 votes
1 answer
1k 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 ...
André Lorenzo Bittencourt's user avatar
5 votes
1 answer
711 views

Options: Vertical LEAPS

I am developing an algorithm and it needs to know what to do in certain market conditions It takes on a Vertical Bull Call Debit Spread on LEAPS that are 12+ months out in the future. This means that ...
CQM's user avatar
  • 1,862
5 votes
2 answers
391 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 ...
CQM's user avatar
  • 1,862
5 votes
1 answer
802 views

In a covered call strategy, should I hold the call or sell/roll if the delta becomes too small?

I am tweaking a covered call algorithm. The short leg consists of out of the money call options. The goal is to collect the tim premium, but an equally favorable circumstance is when the call ...
CQM's user avatar
  • 1,862
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&...
Ramón J Romero y Vigil's user avatar
5 votes
0 answers
283 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-...
Derek Shen's user avatar
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 $S$ ...
user31052's user avatar
4 votes
2 answers
1k views

Books on options trading with a practical bent?

just curious to see if anyone here has come across a book or books on options trading with the practitioner in mind? My lecture slides for instance, go through black scholes and the ins and outs of ...
AShortSqueeze's user avatar
4 votes
2 answers
2k 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-...
Candidate4571's user avatar
4 votes
2 answers
381 views

Greeks and Option Premium

If a linear sum of options is constructed such that the premium payout is zero, then does it mean that resultant greeks of the cumulated options positions will be nearly zero. For simplicity, lets ...
shoonya's user avatar
  • 141
4 votes
1 answer
127 views

How to model/price the risk of Covid-19 and other pandemics

How would you model and price the risk of Covid-19 pandemic? These large cost low probability events with very little history seems to pose a particular challenge when quantitatively modeling and ...
AlRacoon's user avatar
  • 6,612
4 votes
1 answer
2k 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 ...
Jimmy's user avatar
  • 41
4 votes
1 answer
5k views

Effect of time to maturity on european put option

Let $C(K,T,S_0)$ denote the price of an European call option with strike K and maturity T on underlying price $S_0$. Assume interest rate $r>0$. Then of course $C(K,T,S_0) \geq 0$ and $C(K,T,S_0) \...
htd's user avatar
  • 493
4 votes
1 answer
4k 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 (...
CQM's user avatar
  • 1,862
4 votes
0 answers
164 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 ...
vonjd's user avatar
  • 27.5k
4 votes
0 answers
361 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 ...
AlRacoon's user avatar
  • 6,612
4 votes
0 answers
879 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 ...
JejeBelfort's user avatar
  • 1,219
3 votes
3 answers
613 views

Are there any books/articles on how to use options to be long volatility (implied or realized)? [duplicate]

Given the market turmoil of late I have become fixated with this idea of using options to be long volatility (realised and implied). However, I dont know where to start, what to read, who to follow ...
AShortSqueeze's user avatar
3 votes
2 answers
364 views

Short volatility strategy using strangles

For a short volatility strategy using option strangles, is it better to target a fixed premium to earn? Or a fixed vega? Objective is to maximise the return/risk (sharpe) of the strategy. Any help ...
evilbiscuit's user avatar
3 votes
2 answers
1k views

Why/How does a hedged portfolio make profits?

This is probably a very easy question but I am new to the field and couldn't find an answer. Assuming that I am building a hedged portfolio with a long option and going short delta on the underlying. ...
mowgli's user avatar
  • 31
3 votes
2 answers
1k views

Exercise on American call option and dividends

Consider an americal Call option on an underlying paying dividends. Then it is often argued that it is only optimal to exercise right before the dividend is paid out, otherwise one will not exercise. ...
htd's user avatar
  • 493
3 votes
1 answer
3k 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 ...
Shyam's user avatar
  • 71