Questions tagged [option-strategies]
The option-strategies tag has no usage guidance.
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Constructing payoff with options
Suppose that COMPANY A has issued a special bond that does not pay any coupons. At maturity T, the bondholder receives the principal (face value) equal to 1,000 plus an additional ...
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Why a Short Iron condor payoff is showing always positive
I created a Short Iron condor on Nifty 50 index European option for 9 Nov weekly expiry on 1 Nov morning 10.30 AM (live market). It's payoff is showing always positive curve. Why ? However when same ...
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A naive approach to choose a strike
The idea is to choose a strike base on the premium and historical data to have maximum profit.
For example a selling a (European) call.
$$Profit = Premium_K - (S(t) -K)^+$$
Replacing $(S(t) -K)^+$ for ...
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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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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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What would be the practitioner way of hedging jump risks?
I have developed a keen interest in volatility strategies and have implemented various approaches based on practitioner delta. This delta is meticulously calibrated using a no-arbitrage implied ...
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Arbitrage between gamma and delta on smaller timescale in options selling
I have observed that sometimes (mostly for OTM options) near expiration, an increase in option price cannot be fully explained by delta and theta(given volatility is constant). The gamma spiked the ...
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At what threshold on delta percentage should I hedge my option portfolio?
I am able to identify and build an option portfolio with long/short call/put options across different strikes and expiries such that the gamma is positive and cost is negative. Upon inception I hedge ...
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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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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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Accounting of a stock put option for Monthly % Changes
am looking to backtest a strategy of systemic put buying on an equity index (e.g SPX Index) so say a strategy of buying 1Y 90% SPX Puts rolled 1 day prior to expiry.
As opposed to only calculating the ...
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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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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 ...
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Options strategy expiration probability
Big picture
For any options strategy, for any segment between zero profit (breakeven) points, I want to calculate probabilities of the underlying instrument price will be within a segment at ...
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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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Input/References on Generating Exit Signals for Positions that Profit Very Highly from Extreme and "Unpredictable" Events?
For focus, let us restrict the scope of this to vanilla options-based positions/strategies.
In a lot of the accounts that I've seen of those that engage in this sort of investment/trading strategy (...
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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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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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In the CRR model, describe the strategy replicating the payoff $X=(S_T-K)^{ +} +a(K-S_{T-2})^{+ }$ for $a \neq 0$ [closed]
In the CRR model, describe the strategy replicating the payoff
$X=(S_T-K)^{ +} +a(K-S_{T-2})^{+ }$ for $a \neq 0$
$X$ consists of two parts:
European call option with strike price $K$ and expiration ...
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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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Trading options - risk adjusted return
I have often wondered what kind of risk restrictions do traders of options in Hedge funds have but have not managed to find any information on this matter. I presume there must be some kind of measure ...
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What is the expected return of a strangle given it's IV and realized volatility at expiration?
Assuming we have a correct final value of realized volatility, how would one calculate the expected return of a strangle?
Given that a strangle is a bet on volatility it seems that it should be ...
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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 ...
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Reverse convertible coupon determination
I had a question about the coupon level determination for a simple reverse convertible product.
Assuming risk free rates are 4% while premium on short put is 5%, typical text-books would then quote ...
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How to simulate a delta hedged option strategy
I'd like to do a montecarlo simulation of a $\Delta$ hedged strategy (long OTM call) to see how the PnL distributes on cases like:
$\sigma_{bought} < \sigma_{realized}$
$\sigma_{bought} > \...
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Are "American" option strategies traded OTC?
Is there such a thing as an American butterfly spread?
For a European butterfly spread simply buying 1 put with strike price X+a, 1 put with strike price X-a and shorting 2 calls with strike price X, ...
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Would it be possible to combine long butterfly with long straddle, achieving profit no matter the outcome?
This has been bugging me for a while, I feel like I'm missing something.
Simply put, a long butterfly will make profit if the price at maturity does not change much, as shown below
A long straddle is ...
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Are there any good tools for back testing options strategies?
There are all kinds of tools for backtesting linear instruments (like stocks or stock indices). It is a completely different story when it comes to option strategies. Most of the tools used are ...
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$\mathbb{Q}$ measure and $\mathbb{P}$ measure, trading strategy
I just want to be sure if my thinking is correct and does not have any flaws.
Let's define stock as a process $S$ (see the picture below) with real-world measure $\mathbb{P}$, where $p=0.9$ and Bonds ...
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I can’t understand why the premium of two butterflies with same strike but different broadness are approximately the same
Consider the following premiums of calls option with different strikes.
C90 = 57.35
C95 = 52.55
C100 = 47.3
C105 = 42.9
C110 = 38.25
In this case, the butterfly 90-100-110 cost 1 and the 95-100-105 ...
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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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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 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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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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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 ...
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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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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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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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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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On P and L of backspread
Does anyone know how the P and L on put backspread changes as a function of implied volatility and longer expiration?
One wants as much gamma as possible as far as I understand, in turn being related ...
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Why does bull call spread shows higher payoff than bull put spread?
I am trying to compare bull call spread and bull put spread for equity index option. For the options where the put call parity holds, I am getting a different payoff for bull call spread and bull put ...
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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 ...
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Best/worst case scenario after selling OTM call option
You decide to sell a European call option that is currently 10% OTM (for example the strike = 100 and the current price = 90). You have to delta hedge to keep the delta of your position at 0.
What is ...
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Option seller: Why is delta hedging required if I am long/short the underlying with same number of lots as the OTM options I sold?
Situation: Sold OTM call while long the underlying. Stock did not tank, it went up too much breaching the breakeven point (strike price+premium).
If I sell 1 lot of call options and I am being long ...
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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 ...
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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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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 ...
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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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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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