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 ...
Lisa Ann's user avatar
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5 votes
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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
4 votes
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158 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
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4 votes
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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-...
Derek Shen's user avatar
4 votes
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351 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
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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 ...
JejeBelfort's user avatar
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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 ...
fred222's user avatar
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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 ...
Abhijeet Singh's user avatar
2 votes
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38 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 ...
user27636's user avatar
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2 votes
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113 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 ...
fwd_T's user avatar
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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 ...
Alex's user avatar
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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 ...
sn98's user avatar
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2 votes
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437 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 ...
F.G's user avatar
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331 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?
Harry Lijia Qin's user avatar
2 votes
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73 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 ...
user6441253's user avatar
2 votes
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131 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 ...
Tom Bennett's user avatar
2 votes
0 answers
289 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 ...
Weichen Christopher Xu's user avatar
2 votes
0 answers
2k 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 ...
Alexandr  Proskurin's user avatar
2 votes
0 answers
431 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 ...
qcqp's user avatar
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0 answers
144 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 ...
JWally's user avatar
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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) \...
Neeraj's user avatar
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1 vote
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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 ...
Dsp guy sam's user avatar
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 ...
Mazarin's user avatar
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1 vote
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136 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 ...
Shreyans's user avatar
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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. ...
user14664032's user avatar
1 vote
0 answers
245 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 ...
geofflittle's user avatar
1 vote
0 answers
82 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 ...
j bloggs's user avatar
1 vote
0 answers
167 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 ...
HelpExcelSimualtion2020's user avatar
1 vote
0 answers
90 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 ...
TomTom 's user avatar
1 vote
0 answers
92 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,...
Mkl's user avatar
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1 vote
0 answers
57 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 $...
jthg's user avatar
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1 vote
0 answers
200 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 ...
4thSpace's user avatar
  • 167
1 vote
0 answers
165 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 ...
Kon Rad's user avatar
  • 31
1 vote
0 answers
306 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 ...
user155214's user avatar
1 vote
0 answers
150 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?
Flavio's user avatar
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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 ...
Lisa Ann's user avatar
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0 votes
1 answer
34 views

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 ...
Maurizio Marinaro's user avatar
0 votes
0 answers
40 views

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 ...
pmr's user avatar
  • 325
0 votes
0 answers
69 views

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 ...
aoliv's user avatar
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0 votes
0 answers
76 views

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 ...
Frank's user avatar
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0 votes
0 answers
34 views

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 ...
nzc's user avatar
  • 1
0 votes
0 answers
83 views

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 ...
plkn's user avatar
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0 votes
0 answers
92 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 (...
QMath's user avatar
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0 answers
66 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 ...
fwd_T's user avatar
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63 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 ...
Barry G's user avatar
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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 ...
user50810's user avatar
0 votes
0 answers
593 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 ...
Karry's user avatar
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0 votes
0 answers
416 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 ...
CL40's user avatar
  • 171
0 votes
0 answers
297 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 ...
Hans's user avatar
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0 votes
0 answers
281 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 ...
Chandrasekhar's user avatar