Questions tagged [option-strategies]
The option-strategies tag has no usage guidance.
45
questions with no upvoted or accepted answers
12
votes
1
answer
1k
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 ...
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&...
4
votes
0
answers
143
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 ...
4
votes
0
answers
215
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-...
4
votes
0
answers
343
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 ...
4
votes
0
answers
786
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 ...
3
votes
0
answers
50
views
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 ...
3
votes
0
answers
152
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 ...
2
votes
0
answers
37
views
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 ...
2
votes
0
answers
103
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 ...
2
votes
0
answers
741
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 ...
2
votes
1
answer
775
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 ...
2
votes
0
answers
347
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 ...
2
votes
0
answers
291
views
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?
2
votes
0
answers
71
views
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 ...
2
votes
0
answers
127
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 ...
2
votes
0
answers
281
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 ...
2
votes
0
answers
1k
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 ...
2
votes
0
answers
423
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 ...
2
votes
0
answers
140
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 ...
2
votes
0
answers
99
views
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) \...
1
vote
0
answers
23
views
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 ...
1
vote
0
answers
109
views
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 ...
1
vote
0
answers
204
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.
...
1
vote
0
answers
222
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 ...
1
vote
0
answers
74
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 ...
1
vote
0
answers
149
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 ...
1
vote
0
answers
89
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 ...
1
vote
0
answers
77
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,...
1
vote
0
answers
55
views
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 $...
1
vote
0
answers
183
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
0
answers
159
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
0
answers
299
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 ...
1
vote
0
answers
147
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?
1
vote
0
answers
502
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 ...
0
votes
0
answers
62
views
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 (...
0
votes
0
answers
53
views
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 ...
0
votes
0
answers
46
views
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 ...
0
votes
0
answers
29
views
How to customize Leverage on a downside price Option Strategy?
How would you devise and customize a 4 Times Leverage on a Stock Price downward movement using Options, that holds the position for 1 year ? ( to do this, i know likely rolling the option would be ...
0
votes
0
answers
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 ...
0
votes
0
answers
466
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 ...
0
votes
0
answers
371
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 ...
0
votes
0
answers
275
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 ...
0
votes
0
answers
279
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 ...
-2
votes
1
answer
93
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 ...