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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Black Scholes Model and Dividends

My question can be summarised as such: Consider a portfolio. Say it has a price $\Pi = x$. Portfolio consists of a stock and a sequence of call options underlying on the stock. It has been announced ...
363 views

What's the point of discounting in risk-neutral pricing?

Let $\phi$ be a self-financing strategy that replicates a time $T$ option payoff $X$ on stock $S$. By definition of a trading strategy, $\phi$ is previsible. Finally, let $V_t$ be the time $t$ value ...
348 views

Pricing options under restricted domain

How would I price an option when the underlying security is unable to trade above a certain price? I assumed this would be as simple as restricting the limits of integration of the PDF to B (the ...
2k views

Black Scholes Formula, drift term

In the formula, the stock return is modelled as a brownian motion that is a drift + a stochastic term, ok I get that. But the drift term is then modelled as r - volatility ^ 2 / 2. I am not sure how ...
240 views

Is the Binomial Tree Model not self-financing?

Consider a 2-period binomial tree where the derivative price is $f$ and the stock price is $S$. Also, let the bond be deterministic with continuous growth rate $r$ and initial value $B_0$. binomial ...
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In a FX options book, is the sum of P&L equal to the portfolio value?

For a portfolio containing FX options, would the sum of P&L for each option be the portfolio value?
454 views

Calculating time value of an option

Can someone provide me with a robust way of calculating the future time value of an option or point in the direction? I have been reading a lot about the factors that affect it and about betas and ...
89 views

I have some historical options data, and there are duplicates of some options, how to filter them

I have some historical EOD options data for 2013, and there are duplicates listed for same strikes/expirations. I was told that by the provider that this is due to "special one-time cash payout" for ...
694 views

How to price exotic options using Monte-Carlo?

I am actually trying to solve some exercise problem using Monte-Carlo and C++ for exotic options. Namely, the exotic options are geometric Asian options and discrete barrier option. It is claimed ...
61 views

Does a call calendar lose its entire value if underlying increases well past the strike?

If I buy a call calendar spread, and the underlying increases, both options are in the money by the expiry of the short call. So both options increase in value, but the short one increases less ...
943 views

Convert a call spread to a butterfly to mitigate risk

I do not have a source for this (apologies), but sometimes, I hear about option traders initiating a vertical spread(short) and then converting that call spread to a butterfly spread to mitigate risk. ...
3k views

Which interest rates to use for options pricing?

I am looking at the historical treasury interest rates and am uncertain which rates would be best to use for options pricing. Should I use 1 month, 6 month, 2 year? See: http://www.treasury.gov/...
2k views

How to compute the VaR for European Call, using the delta-normal method?

I have a European call option with current stock price $S_0$, strike $K$, risk-free rate $r$, volatility $\sigma$, and time to maturity $T$ years. I assume that the stock price at time $t$, which is ...
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How to manage risk on a call calendar when underlying is falling

Let us say I bough a call calendar spread. Now, at expiry of the short option, the underlying has decreased significantly, and I am approaching my max loss(i.e both the options are close to 0). In ...
112 views

Why vega increases further out in time

Why do back months options have a higher vega than front month options? If possible , kindly explain on an intuitive level without a lot of math.
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Pricing of a call option in one period binomial model

You are given a $5\%$ call option worth $\$2.66$. The strike price$k$is$\$41.00$. $S(0)=40$, $Sd=35$ (i.e the lower price of the stock at $t=1$) find $Su$ (i.e the high price of the stock at $t=1$)....
1k views

How to approximate the time to mean reversion for implied volatility

Given an option and its implied volatility, and also the mean value of the implied volatility over the last 30 days, if we find that the current IV is significantly (> 1 std dev.) away from the mean, ...
Sometimes, in an option chain, the implied volatility of an option is greater than 100% . How is this possible? I mean, it is possible for 100$stock to increase more than 100%, but not decrease more ... 1answer 430 views What does the “-E” mean at the end of a CBOE options symbol? Below is are some option quotes taken directly from the CBOE website. I am wondering what the -E, -4, -8, -A, -B, -I, -J etc..that are at the end of the options ... 2answers 2k views Why is the vega of an at the money option so insensitive to movements in volatility? I.e, why do ATM options have such little Vomma? I've been trying to understand why at the money options have very little vomma. I was reading and came across a graph that showed vega as volatility changes and I couldn't grasp how the relationships ... 0answers 130 views Straddle neutral strategy What does it mean to implement a delta-neutral strategy for straddle ? A straddle consists in buying a call and a put simultaneously, at the same date, on same underlying, with same maturity and ... 2answers 9k views What causes the call and put volatility surface to differ? I currently have a local volatility model that uses the standard Black Scholes assumptions. When calculating the volatility surface, what causes the difference between the call volatility surface, ... 2answers 254 views Option greeks: sensitivity to 1% move In a Black&Scholes framework how can I compute the following sensitivities: to 1% move in the underlying price to 1% move in implied volatility I would like the greeks to tell me how many ... 2answers 645 views Is it fair to assume$(ud=1)\$ in the binomial tree option pricing model?
I have discussion with my colleague on why a general assumption $$ud=1$$ in binomial tree option pricing model would be necessary? I take it a simplification of the problem, otherwise, there will be ...