Questions tagged [options]
A contract that gives the owner the right, but not the obligation, to buy or sell a security at a fixed price in the future.
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Does skew flatten with a decline in volatility?
In Trading Volatility by Bennett, he says:
If there is a sudden decline in equity markets, it is reasonable to
assume realised volatility will jump to a level in line with the peak
of realised ...
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How to calculate expected value for an underlying contract and expected value for an option?
In Sheldon Natenberg's Options Volatility & Pricing, he writes:
There is an important distinction between an option position and an underlying position. The expected value for an underlying ...
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Quantlib - bond with capped coupons
Using QuantLib I want to price a Floating rate bond whose coupons are capped at some rate.
I understand I could price the coupon caps separately and then add that to a zero-bond.
However, I've noticed ...
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Popular treasury futures bond options volatility surface model/s
I am looking for volatility surface parametrisation model used for treasury futures bond options. I know that most popular for options on equities its SVI, on FX its Vanna-Volga, on rates its SABR. ...
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Could a certain Volatility Surface generate two options with different strikes but the same Delta?
Is it possible for a volatility surface $\sigma(K,T)$ results in two options (both call or puts) with different strikes, but the same Delta, i.e., $\Delta(K_1,\sigma(K_1,T);S,T,r)$ = $\Delta(K_2,\...
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Intuition behind calendar spread max loss
With a calendar spread (buying back, selling front), max loss is defined as some variant of "maximum potential loss is the cost of opening the trade (Premium Paid − Premium Received = Total Debit)...
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How do you price, trade and hedge inverse options? [closed]
Deribit currently is the main crypto options exchange. The options contracts offered are inverse options, is there a standard "industry" way of pricing, trading and hedging those contracts? ...
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How to improve fit in American options vol surface?
I am trying to model the volatility surface of index etfs (spy, iwm and qqq). I am using the CRR model with discrete dividends and the spot model. I find that for some cases there is a noticeable ...
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Pricing the embedded option in a callable floating rate note
From my understanding, I know that we can decompose a long callable bond into a long vanilla bond and short receiver swaption. However, I do not understand, how could I separate or calculate the ...
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How to properly weight fair value, theta, and cega in a multi asset model?
I'm working with a multi-asset worst of model and the outputs are FV,d1,d2,g1,g2,v1,v2,cega, theta.
Its easy to assign proper delta, gamma, vega to the respective asset1 & asset2, but how would ...
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Implying a probability distribution from option prices [duplicate]
I was reading this article, when I came across this text:
Without using a complex options pricing model, one can use intuition
to translate option prices into implied probabilities. For instance,
the ...
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Calibration of Local or Stochastic Volatility Models to Prices vs Implied Volatilities
As the title suggests, what is the difference between calibrating an option pricing model (say the Heston model) to market option prices instead of computing their implied volatilities using Black-...
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What is the reason for adding 0.5 variance when calculating the ATM DNS of an option?
Why is an Option ATM DNS (Delta Neutral Straddle) strike calculated using exponential value of (rate + 0.5 variance) * t. For ATMF (At the money forward), the rate time is used as the value in ...
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How to derive numeric option VaR with delta-vega normal approach?
For an option with price C, the ΔC, with respect to changes of the underlying asset price S and volatility σ (first-order approximation), is given by
$\Delta C=\delta \Delta S+\nu\Delta\sigma$,
where ...
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Getting incorrect options data with IB API. Missing real time market data subscription?
I'm having a problem getting options data with IB's API. The data seems not to be correct. In my code I'm getting some 0DTE call options for the Mini SP500 March Futures contract and printing their ...
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What shall I do to make my delta neutral? [closed]
Suppose that yesterday I shorted some call and put option contracts of an underlying and I had a neutral delta. This morning, I have a positive delta, and I want to keep my delta neutral. What do I ...
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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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Heston formulae and characteristic function for FX options (or dividend paying yield)
I've seen the formulae for Call valuation with the Heston model for non-dividend paying Stocks.
How should I modify it to use it in an FX pair (which has two risk free rates: local currancy rate $r$ ...
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Shape of FX Volatility Surface
I'm familiar with the volatility surface for equity options with the smile/skew dynamic and flattening with increased maturity, and the explanation/intuition behind its shape. However, today I came ...
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How to compute Vega in the Heston Model
I am computing European Option Sensitivity as: Delta, Vega and Gamma. I am using Heston Model to simulation spot and the variance.
While computing Delta and Gamma, I understand, we need to bump spot ...
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Iron Butterfly Relationship with Butterfly
I'm reading Natenburg's Options book, and I'm not understanding why "Buying a traditional butterfly is equivalent to selling an iron butterfly," because later in the text Natenburg says that ...
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Working with wide bid ask spreads in option pricing model
I'm trying to fit an Heston model to market data. But market is data has some terms (<3M) with quite wide bid-ask spreads (12%-25%). Should I just use mid volatility? Is there maybe a model to pre-...
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Volatility surface
When fitting/calibrating a option model like heston to option data, what are some useful data handling to do?
The basic thing is to remove all options with no trade/volume, but how many maturities ...
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How would I find correlation / association of different time series datapoints with a target variable?
the title is a bit confusing.
Functionally, I have a dataset of N stocks containing options information, short information, and earnings information for each of the N stocks.
For each unique stock in ...
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Delta Hedging using another correlated asset
My question is about the following (from Maxime de Bellefroid, Ch. 5 The Greeks):
From my understanding $\Delta_2$ is the sensitive of the option (on the first instrument with underlying $S_1$) with ...
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If you continuously delta hedge a long option position will you be flat at expiry regardless of realized vol? [closed]
Learning about gamma and am confused about practical gamma trading strategies and struggling to understand how they can be monetized. Is all gamma just about setting limit orders above and below and ...
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"Forward" attribute for an option
I am downloading implied volatilities for some options. I noticed, however, that I am also able to choose "Forward" as an attribute for the option. What is this? Is it an option written on a ...
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Bloomberg field name to get implied volatility of options
I am trying to get option data from bloomberg api. I got the all available options on a given underlying eg:"ASML NA" and Field "PX_LAST" gave the last traded price for each option....
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difference between strike notional and spot notional
Can someone please explain the difference between strike and spot notional? in the context of equity options trading?
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Butterfly price bound independent on underlying distribution
Assuming no fees and interest rate $r=0$%, what is the most you would be willing to pay for a \$103/\$106/\$108 European call fly, regardless of the underlying distribution? Buying the fly in this ...
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Option Prices And Calibrating The Heston Model Code Question
I'm trying to understand this Python code that uses Quantlib to calibrate the parameters of the Heston model. The data that is provided in the code is the spot price, the risk free interest rate, the ...
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Does Black-Scholes imply that the expected return for an asset is fixed as the volatility increases? [closed]
I'm new to this, and just trying to understand what options prices imply about asset growth. I'm looking at the following expression for the underlying asset price in the Black-Scholes model, in ...
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QuantLib including holiday in option price
I am trying to add a holiday to my calendar in QuantLib such that my option pricing model considers this in pricing where I would expect that the time to expiry should decrease with the inclusion of a ...
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Calculating the PnL of a delta-hedged option at a point in time
In a BS world (constant volatility, no transaction costs, continuous hedging) If I buy or sell an option and continuously delta-hedge, I know how to calculate the final expected PnL based on implied ...
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Time steps in CRR Binomial Option Pricing for American Options
how do you determine the time steps required as inputs to the Cox Rubinstein Binomial Option Pricing model when trying to determine the fair price of an American option? Most textbooks and literature ...
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Calculate Value at Risk for a futures contract or option position [closed]
How could we calculate VaR for a futures contract or a option position? I know that a VaR is calculated by the return multiply the investment amount, but how could we calculate the investment amount ...
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ESSVI calibration problem in translating parameter bounds
I am trying to implement the calibration algorithm presented in the "ESSVI Implied Volatility Surface" white paper from Factset by Akhundzadeh et al.
The eSSVI model includes 2 variables ...
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Pricing Option with Payoff of $S_T$ units of a European Digital Call [duplicate]
I am in a Black Scholes market with the usual riskless asset $B$ and risky asset $S$ with dynamics given by
\begin{align*}
dB_t &= rB_t dt, B_0 = 1, \\
dS_t &= rS_t dt + \sigma S_t dW_t^{\...
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What is the arbitrage opportunity and strategy here? [closed]
Suppose that the current stock price is $€100$, the exercise price is $€100$, the annually compounded interest rate is 5 percent, the stock pays a $€1$ dividend in the next instant, and the quoted ...
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What is the meaning of Domestic Exchange Rate here?
So I have the following formula for the Pricing of a Quanto Option (see image below).
While I understand this formula pretty well, I am not sure what is referred to as "domestic exchange rate&...
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Calculating PnL of Options strategies with Volatility Surface
New to Vol trading - wondering if there are any good references on calculating PnL from options strategies if I only have a volatility surface (delta or moneyness) and no individual options prices.
...
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Representing a continuous time hedge discretely
I recently came across an example (Section 5.2.9 here) which does a simple delta hedging experiment. Below are the details:
Market conditions
Interest rates are at a 2% level --> r = 0.02
The ...
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How can I derive the price of american options given the european options prices? [closed]
I have the european volatility surface of a given asset. What is the correct procedure to compute the price of the options with american exercise type?
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How do sell-side institutions manage interest rate derivatives books in practice?
I'm interested in real practices of hedging interest rate caps and floors. There are plenty of articles explaining pricing of interest rate derivatives, but not so many explaining hedging such ...
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How can I use SPX options volatility surface to derive SPY options prices? [duplicate]
I am trying to figure out what is the correct procedure one can use to derive the prices from SPY options given the prices of SPX options.
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Why does Natenberg say that when future options with future-type settlement are traded, no money changes hands?
I feel I am fundamentally misunderstanding something when it comes to options on futures. On the bottom of page 98 of 2nd edition Option volatility and Pricing by Natenberg he says:
"In the US, ...
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Call option on forward [closed]
What is the trade description behind a call option on a forward? How can it be described with words and not with mathematical formulas?
So what is the intuition behind the following payoff:
$$Payoff_{...
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No expected return in Black Scholes formula: But how about the gamma?
A lot has been written about the fact that the expected return of the underlying asset is not part of the Black Scholes formula. I understand the argument that the performance of the underlying asset ...
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Bond Option: Cash Price or Quoted Price as Underlying
John Hull mentioned in his book using Cash Price(Dirty Price) instead of Quoted Price(Clean Price) in pricing a bond option using Black-Scholes. It confuses me as it seems more natural to assume the ...
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Characteristic Function Kou (2002) Model
I'm looking for the correct characteristic function for the Kou (2002) jump diffusion model.
Can someone help me? Because if I try to look at it online everyone forgot $r$ and $S_0$.
This is what I ...
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