Questions tagged [option-strategies]
The option-strategies tag has no usage guidance.
195
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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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Calculating Greeks in Covered Calls?
Just want to confirm whether Delta, Gamma, Theta, Vega will be calculated in the following way? Since we own 100 shares of stock while selling a call we need to subtract greek value from one? right?
...
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Seagull option strategy - clear example
It looks like the subject of seagull option strategy is not as clearly explained as for other strategies (butterly, bull,bear spread). Thus, can someone provide a clear example of what you buy and ...
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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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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 ...
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Hedging differences between equity and index options?
Suppose we hedge an index option using futures on that index. How would the hedging strategy be different if the underlying could be traded directly (from a risk point of view)?
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stock option strategies long vs short
What makes an option strategy long or short?
I got the impression that if it is a net debit (you pay to open the strategy) it is classified 'long' (strangle, straddle)
Then I learned about the call ...
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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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What is the benefit of holding a short option?
I am new to corporate finance and I ask myself why an investor is interested in being short an option? He can only can win a premium but he can lose much more. I understand with being a short, I cap ...
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analytic formula for the value of an American put option
It seems to be a foolish question but I can't take my mind off from , Is it true that there is no analytic formula for the value of an American put option on a non-dividend-paying stock (or a divident ...
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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 ...
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What does it mean for an option strategy to be leveraged
Probably a newbie question, but what do traders mean when they say that an option strategy is leveraged ? And when can we say that it is the case ?
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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 ...
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Confusion about optimal choices with exotic options
With exotic options, holders usually face choices at certain times. In my understanding, the price of the option is determined by assuming the optimal choice is taken and computing the discounted ...
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Calculating a Covered Call Strike with N% Probability that Shares Won't be Called Away
I'm starting to experiment with covered call strategies, and I'm trying to find the right strike price to sell for my covered calls such that I can maximize premium while being generally "...
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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 ...
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Calendar spread: What are the worst cases?
I am looking to solely make use of the theta decay and trying to overcome the effects of delta and Vega.
If,
I sell ABC Feb OTM (strike price X) with 3 x 10 = Rs. 30 credit and buy ABC Mar OTM (...
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What is most reasonable approach to determine side of a multi-leg options order?
Say, 4-legged multi-leg options order with below leg
...
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Double Call Option
A double call option allows the holder to either exercise at time $T_{1}$ or time $T_{2}$, where $T_{2}$>$T_{1}$. With corresponding strike prices $K_{1}$ and $K_{2}$, it can be shown that it is never ...
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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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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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Implementation of an option tail-hedging strategy
This question directly refers to the paper "Capital Asset Pricing Mistakes: The Consistent Opportunities in Tail Hedged Equities", http://www.universa.net/Universa_SpitznagelResearch_201501.pdf.
Very ...
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How to find the price variance of an infinitely expanding Binomial Tree?
How to find the price variance of an asset in a Binomial Tree Model? Suppose the price of the Stock is $S_t$ at time $t$ and it has a probability of $p$ that will go up $u$ times to $u \cdot S_t$ and ...
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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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How to measure the performance of an systematic option strategy
I have a strategy based only on option instruments and I am trying to measure its performance to optimize some parameters. But how does one measure the performance of such strategies?
For Sharpe ...
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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 ...
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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 ...
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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 ...
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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!
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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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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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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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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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Is there a sound logic for buying a portfolio of call options in the same ratio as you would buy the underlying shares?
Suppose I believe it would be profitable to build an investment portfolio by investing, say, USD 30,000 in stocks in the following ratio: 30% in shares of CompanyA, 30% in CompanyB and 40% in CompanyC....
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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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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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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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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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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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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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Under what circumstances would one want to delta hedge a straddle
Under what circumstances would one want to delta hedge a straddle option? This link
explains:
...
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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 ...
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Option arbitrage with dividends?
If a stock pays a discrete dividend, the stock price falls by the amount of the dividend. There is no arbitrage opportunity from this predictable jump, because the investors receive the same amount of ...
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What is this option strategy called?
I have been playing with option strategies in order to understand the advantages/drawbacks of all of them.
Then I realized this type of strategy is not so advertised in the web and cannot find any &...
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Equivalent combination of puts
Suppose that a certain stock is currently worth $S_0=\$61$. Consider an investor that buys
one call with a strike price equal to $K_1=\$55$, that costs $c_1=\$10$, buys another call with strike
price ...
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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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Mysterious disappearance of options from historical datasets
I am in the process of analyzing historical options data, and I keep finding options that mysteriously disappear before they are due to expire. For example:
For the QQQ $69 Put,
http://www.eoddata....
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Why long power and short gas for Merchant power plant
Merchant power plant is one that can be turned on whenever you want. Suppose it is generating electricity from natural gas and we have a spark-spread option. Why is that the person who owns plant is ...
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