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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5
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2answers
311 views

Analysis of Unbalanced Covered Calls

Hello I am doing an analysis on covered calls with and extra amount of naked calls. Ignore the symbol and current macroeconomic events. I couldn't find any reference to this strategy (unbalanced is ...
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2answers
6k views

Early exercise of American options

I know this question is considered basic and has been asked millions of times, but I have done my research and there are some points that I just can't understand. For an American call, many ...
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1answer
112 views

Are bid-ask spreads in options related to bid-ask spreads in their underlying?

If an underlying has a large bid-ask spread, does it mean that its options will have large bid-ask spreads too? Is there any relation between the bid-ask spreads of options and the bid-ask spreads of ...
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2answers
53 views

Why does borrowability of shares inversely correlate with probability of assignment or exercise?

I transcribe 5:26 of this video. I don't know that YouTuber's credentials. So looking back here, what could possibly cause you to get assigned early? If we look right here, AMD shares are listed as ...
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1answer
42 views

Risk-Neutrality: Discount factors of the $P$ world according to risk preferences?

I am coming to terms with the connections between the so-called $P$ world and the $Q$ world. In my understanding, the risk-neutral measure $Q$ induces a probability space under which investors are ...
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2answers
75 views

If you're betting on an extreme price movement, ought you buy OTM or ITM options?

Please see the titled question. This Reddit comment asks a related question. So does going deep ITM reduces the risk but also reduces the return on the investment in case the stock spikes up? Since ...
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0answers
34 views

How to write the iterative procedure hedging with replicating method?

I'm trying to replicate the following delta hedging table from hull(10th ed, table 19.2): Older ed How to understand this example from Hull's book? ...
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14 views

Backward difference approximation (BDF-2) for Options

I am working on a project for compound options and the assignment is as following: ...
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57 views

What are the boundary conditions for the Forward contract PDE?

European call When solving the PDE for the value $V$ of a European call option under the Black-Scholes model using a finite difference scheme, we have that Initial/terminal condition. $V(S_T,T) = \...
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28 views

Option Valuation With Hard To Borrow Rates

How would you include -in a simple way- high borrow rates, say 10%. Intuitively, for PUTs I'd set r as r - borrow_rate, to include the negative carry of the borrow. So If I'm selling puts, value would ...
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48 views

Option percentage quotation for structured products

I am having some trouble to understand how option premium can be a percentage for structured products. For example, in an Equity Linked Note, let's say the bond part cost 80% of notional we have 20% ...
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32 views

Is there a general method by which we can replicate a given payoff? [duplicate]

I've been studying how to replicate different payoffs using options and zero-coupon bonds, and each time there's a different approach to solving the problem. I've been wondering if there's a general ...
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how can we calculate options profit and loss using volatility and implied volatility in a span margin calculation

complete the table below, mainly we have to use black-scholes model for implied volatility calculations which I am getting as 43 % but now how to make a gain and loss table using this implied ...
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1answer
57 views

What are good machine learning projects for a senior student? [closed]

I'm a senior year student, I study software engineering, I recently started with a machine learning tutorial, I want a machine learning projects that are not hard to make and at the same time good for ...
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1answer
75 views

Why are options on futures that are subject to futures settlement insensitive to changes in interest rates?

Why is it that, if options are subject to futures-settlement and the underlying futures themselves are also subject to futures settlement, then these options are insensitive to interest-rate changes?
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1answer
62 views

Can we use a VIX-like method to calculate implied volatility for Black Scholes model?

So I understand that the VIX is an estimate of implied volatility. Volatility can also be calculated from the Black Scholes model. My question is can we use a VIX-like method to calculate implied ...
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28 views

Do option values depend on whether a trader hedges with a long stock or short stock position?

Sheldon Natenburg in his book Option Volatility and Pricing in the chapter on Risk Management is trying to explain the effect of interest rates on options. He says The value of a stock option will ...
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1answer
36 views

How do short stock positions lower the value of calls and raise the value of puts?

I'm reading Option Volatility and Pricing by Sheldon Natenberg who in the chapter on Risk Management is trying to explain the effect of interest rates on options. He says The value of a stock option ...
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0answers
61 views

Advice for senior thesis [closed]

I'd like to get my degree in mathematical finance, or eventually in quantitative finance. Could you give me some (original) ideas, maybe transversal between the two, on which to focus my thesis? ...
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4answers
53 views

For Short Call Spreads, if the stock keeps rising, why does a higher Long Call's strike price enlarge the risk?

How's the bolded sentence below correct? I know this is a Short/Bear Call Spread. If MSFT's share price $ < 13 0$, then as $p \to 130^{-}$, the 110 call's price rockets whilst the 130 call stays ...
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Determination of critical stock price in compound option pricing

Under the Black-Scholes framework, there is a closed form formula for the price of a compound options, as first derived by Geske (1979). However, the analytical formula refers to a critical stock ...
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1answer
42 views

For option spreads, why ought the debit paid $\le 75%$ of the strike width?

Diagonal Spread | Definition of a Diagonal Spread | tastytrade | a real financial network The trade will be entered for a debit. It’s important that the debit paid is no more than 75% of the width of ...
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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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1answer
105 views

In Long Call Spreads (Poor Man's Covered Call), why wouldn't Rolling be too expensive? [closed]

Are Long Call Spreads = Poor Man's Covered Call? Bob Baerker wrote: If so inclined, you can also write OTM short calls against them, turning your long call LEAPs into diagonal spreads and lowering ...
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0answers
48 views

How to find the risk-free rate and dividend rate for S&P 500 index options?

I'm currently working on a project using S&P 500 index options(European) data. I haven't done any empirical experiments before, so I'm confused how to find the corresponding risk-free rate and the ...
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1answer
79 views

How to understand broken wing butterfly option strategies?

I feel very confused about the greeks analysis for the broken wing butterfly strategy. Let's say for the stock ABC, we enter into a such strategy: we long a put option with strike $k_1$ and another ...
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1answer
159 views

Expected Delta hedging frequency as function of implied (and realized) volatility

I'm looking for a proxy (or some rule of thumb) that can create a link between the implied volatility, the realized volatility and the frequency of Delta hedging required to keep the Delta as close as ...
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33 views

How does the real market calculate the option prices when strikes are very small?

I'm working on the S&P500 European index options data(call options). On 2017-10-23, we have the closing price as 2564.98, and risk free rate is 1.09%(3 months treasury bill). If I choose the ...
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1answer
54 views

How to get exposure to realised volatility while being vega neutral?

Let's say I am predicting the realised volatility of a stock index. I am buying or selling straddles based on whether the predicted vol is higher or lower than the implied ATM volatility for the ...
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40 views

Carr and Madan algorithm to avoid arbitrage in oprion prices

Hey in this text (https://arxiv.org/abs/1107.1834) in section 7 is described an algorithm which can delete options which generate an arbitrage. $C_ij$ is call option price with strike $K_i$ and ...
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1answer
54 views

Create a Synthetic Single Stock Future

Is it possible to create a synthetic long single stock future using the stock and it's vanilla options with the caveat that selling naked puts is NOT allowed? That is, you can write puts, but they ...
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1answer
66 views

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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1answer
316 views

Exercise Probabilities Vanilla Cap/Floor

When looking at the discounted pay-off formulas of a vanilla caplet and a vanilla floorlet $\frac{\Delta\tau}{1+r_k\Delta\tau}\max(r_k-r_{cap},0)$ $\frac{\Delta\tau}{1+r_k\Delta\tau}\max(r_{floor}-...
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1answer
109 views

Calibrate Stochastic Volatility Model

For stochastic volatility models, and any vol model I know, it seems the standard approach is to calibrate the model from option prices. As other user said, this seems a chicken egg problem - how do I ...
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1answer
109 views

Historical S&P 500 OPTION data on WRDS, no access to Option Metrics

I'm looking for historical data of S&P500 options. I have access to Wharton Research Data Services (WRDS), however, my university does not provide access to Option Metrics. Is there another way ...
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0answers
34 views

Cumulants of Meixner distribution

Hey characteristic function of Meixner distribution is: $$\Phi(u)=\left(\frac{\cos(\beta/2)}{\cosh((\alpha u-i\beta)/2}\right)^{2\delta}$$ I need to calculate the first, second, and fourth cumulant of ...
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1answer
71 views

Is there a reason why futures and options have more substitutes than other financial instruments?

This is somewhat non-technical question, but it seems like this forum is still the best place for it. I'm reading Shleifer's Inefficient Markets, where he points out that [...] for futures and ...
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1answer
749 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 ...
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0answers
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Size Option in Vanilla

How to compute the price of a vanilla option (or a forward starting option) if there is extra optionality to change the Notional by a pre-determined percentage ($a%$, say)at some future time $t$ ...
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55 views

Behavior of Vega PnL for 6 month ATM S&P500 option

I am interpolating the vol surface for 6 months maturity from price data for S&P500 options. For this vol smile I compute the ATM strike. I then assume I can buy a call option at this strike, ...
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0answers
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Call options data from 18 April 2002 (Schoutens 2003)

Hey I would like to calibrate different models to call options prices from 18 April 2002. Schoutens used this data for calibration but unfortunately he write only months (screen). What can i do in ...
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1answer
42 views

Is this a new way to profit from earnings releases using long straddles?

How much can I reasonably make if I buy a long straddle just as soon as earnings release day is announced and ride the rise in implied volatility along with any movements till the earnings release ...
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1answer
64 views

Hedging predicted volatility

Q. If you predict the volatility of the stock is 10% a year from now and current price is X dollar, how do you hedge the risk? Im not sure why I am finding this so hard. How do we use options (...
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1answer
83 views

Calculating European call option, the Bjork way

We have a 3 period binomial tree with values: ...
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1answer
45 views

Finding option price using intraday data [closed]

I have the option price at a rate which is much smaller than the rate at which I have tick data for the underlying. If I have option price at times $t_1, t_3, t_5$ and I have tickdata at $t_1, t_2, ...
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1answer
75 views

Intuitive explanation of put option pricing based on put-call parity

Assuming no dividends, the put-call parity equation says: $c + \mathrm{Ke}^\mathrm{-rT} = p + S$ where $c$ is the price of the European call, $p$ is the price of the European put, $S$ is the current ...
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0answers
54 views

Risk free rate application to option pricing

We have $S_o = 50, u = 1.0606, d = 1/u, K = 54.50,$ risk free rate $r = 0.1$ per week, maturity in 9 weeks, given a binomial tree (3 steps)with the probabilities given by $q = (1+e^{r(T-t)}/u-d)$, no ...
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1answer
136 views

GARCH(1,1)-M MLE optimization with fmincon in R

I've searched thru dozens of papers and did not find in any of them satisfying and enough theoretical answers to my concerns. So I've combined everything what I found below. Please indicate if my ...
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1answer
4k views

Barrier option (autocallable) Vega profile

I have a question about the Vega profile(graph) on an autocallable option. Generally for a regular option, the vega graph looks like a normal (kinda normal) distribution with the vega highest at-the-...
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1answer
84 views

Why does black scholes model give lower prices for puts with further time to expiry?

Consider BS-model with parameters: Stock = 100, Strike = 100, Texp = 1 year, Vol = 13%, Rf Rate = 3%. For these parameters the BS put price is 3.76. Then consider the same parameters but with Texp = ...

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