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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15
votes
2answers
2k views

Can you replicate an option on an arbitrary basket of stocks?

Since a market index is nothing more than a basket of stocks, you can create your own index by putting together stocks of your choice. The only difference is that you can trade options on major ...
2
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1answer
197 views

OTC Equity Options' Dynamics

This only applies to options that do not have marketable equivalents since margin can be marked to them. I've never been able to find this on my goog. How is margin typically calculated for OTC ...
2
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2answers
180 views

monthly contract volume required for penny increments?

Have the exchanges disclosed their criteria? Does anyone have a best guess based upon observations of volume (however you wish to define it)? Please no qualitative answers.
1
vote
2answers
288 views

changes in open interest vs changes in underlying volume

Has a relationship been noted? Mostly, I'd like to know if the open interest increases on an underlying, does the underlying usually see increased trading? My guess would be "yes" since MMs can ...
8
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3answers
6k views

What really drives option implied volatility?

A common and oft repeated belief regarding options volatility is that implied volatility increases due to people bidding up a contract, usually related to anticipation of the outcome of an expected ...
2
votes
1answer
560 views

Calculating the probability of a price change using an options pricing formula

I don't know if I'm doing this right and I'd greatly appreciate help. I'm trying to use an option pricing formula to backout the likelihood of the Euro dropping below $1.27, even for a minute, at any ...
5
votes
1answer
225 views

Hedging with actual volatility: problem understanding the math behind the result

From this paper. page 3 We get that the total profit at expiration is the difference in value between the price of the option with actual volatility and the one with implied volatility. I have tried ...
4
votes
2answers
130 views

Endogeniety of Black-Scholes

I know this is a naïve question but how does the BS formula have a closed form solution? It seems from what I am reading Price impacts delta, price influences volatility which in turn influeces delta ...
4
votes
2answers
3k views

Theta's effect for OTM options

How does $\Theta$ change for deep out-of-the money options? Looking at the below graph, it seems the time decay is highest for ATM options and increases rapidly as we approach maturity of the option. ...
10
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0answers
1k views

option chain data visualization, sunburst

I think option chains are not represented in the best way. With more and more options products coming out and trading on the various exchanges, I see vendors struggling to keep up with a good way to ...
3
votes
1answer
805 views

Choice of epsilon for numerical calculation of vega in binomial option pricing model

I have a binomial option-pricing model (I don't think the details of how its implemented are relevant). However, when I go to calculate vega, I am essentially running the model a second time with new ...
4
votes
1answer
414 views

Can a long put trade be profitable through Vega even if the underlying moves upwards?

Generally speaking, I know when implied vol increases, option prices increase for calls. However, does the same occur for puts? If I am expecting implied volatility to increase for an option on an ...
4
votes
2answers
2k views

Why doesn't a simulated delta hedging process go to zero?

I put together a simple simulation of delta hedging a set of options with an underlying and it seems that the fluctuations of the price still seem to affect the final outcome. The reason, I understand ...
2
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1answer
2k views

How to calculate implied volatility and greeks in Bull Put Spread option strategy?

Ok, obviously I am buying lower strike put and selling higher strike put. What is the recommended volatility and greeks to consider in my trade? Volatility: Average volatility between both legs? ...
5
votes
2answers
604 views

How to quickly sketch a second order greek profile for a vanilla position?

Assume that you are given an arbitrary payoff profile for European vanilla position (e.g. butterfly). How to make a back of the envelope sketch of a second order greek profile for it (i.e. plot ...
1
vote
1answer
1k views

Which prediction market model is efficient and simple to use?

For a college project I'm tasked with implementing prediction market. Which model of it I'd better choose? I want something useful and simple enough for other people to quickly understand and use. (...
2
votes
2answers
2k views

Delta of a Down and Out Call

I came across some graphs depicting the delta of a down-and-out call. They show that, if the risk free rate of return is 0, the delta is constant at 1. However, if the rate of return is for example 5%,...
13
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4answers
3k views

Methods for pricing options

I'm looking at doing some research drawing comparisons between various methods of approaching option pricing. I'm aware of the Monte Carlo simulation for option pricing, Black-Scholes, and that ...
4
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4answers
11k views

Why is short term implied volatility typically higher?

Why do short term implieds move more than long term?
3
votes
1answer
798 views

Value options when the currency’s risk free rate is negative?

How would you handle a negative interest rate in index/equity options valuation? An example would be negative rates for short term maturities for Swiss Frank (CHF).
31
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5answers
12k views

Skew arbitrage: How can you realize the skewness of the underlying?

It's not clear to me how to realize skewness. In other words, how do you implement skew arbitrage? There seems to be no well-known recipe like in volatility arbitrage. Volatility arbitrage (or vol ...
3
votes
2answers
3k views

Why do ATM call options have a delta of slightly bigger than 0.5 and not 0.5 exactly?

From the formula of the delta of a call option, i.e. $N(d1)$, where $d_1 = \frac{\mathrm{ln}\frac{S(t)}{K} + (r + 0.5\sigma^2)(T-t)}{\sigma\sqrt{T-t}}$, the delta of an ATM spot call option is ...
3
votes
0answers
508 views

Pricing a Power Contract derivative security

I'm trying to price a "power contract" and would appreciate guidance on the next step. The payoff at time $T$ is $(S(T)/K)^\alpha$, where $K > 0$, $\alpha \in \mathbb{N}$, $T > 0$. $S$ is ...
2
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0answers
625 views

How to calculate a the PFE for a Swaption?

How do you calculate the Potential Future Exposure (PFE) for a swaption? Do you incorporate the dynamics of implied volatility when you are running your simulations? Is there a standard way to ...
2
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1answer
353 views

Question on OptionMetrics: when are adjustments for discrete dividends needed?

Bakshi et. al. (1997) analyzes the empirical performance of some alternative option pricing models. I am interested to do this as well - hence applying different models - but I am unsure how to handle ...
-4
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1answer
3k views

Show that convexity of call price as a function of the strike is violated [closed]

European call options with strikes 90, 100 and 110 on the same underlying asset and with the same maturity are trading for 22.50, 18.84 and 13.97 respectively. show that the convexity of the call ...
10
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4answers
3k views

Why the interest rate for put-call parity is not constant?

Usimg the put-call parity $C - P = S - K · e^{-rt}$ I tried to estimate the value of $e^{-rt}$, the present value of a zero-coupon bond that matures to 1 in time $t$: $e^{-rt} = (P - C + S) / K$ ...
4
votes
1answer
202 views

Creating a doubling and halving position

I want to create a position that either multiplies with $1+u$ (outcome $U$) or $1-d$ (outcome $D$). The probability of $U$ is denoted by $P(U) = \pi$. The initial value of the position is $V_0$. Given ...
5
votes
2answers
4k views

Equity option portfolio greeks with underlying

I'm curious about how to construct the five basic greeks for an equity option portfolio when there are shares of the underlying in the portfolio. For example, a portfolio of 100 call options and 100 ...
4
votes
1answer
185 views

How do I model risks for specific short-term short calls in a portfolio with limited data?

I'm trying to do some risk analysis on a portfolio of bonds, currency, stocks and short calls. The short calls expire in approximately 15-30 days and I've only got around 20 days of pricing data on ...
10
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2answers
7k views

When to use Monte Carlo simulation over analytical methods for options pricing?

I've been using Monte Carlo simulation (MC) for pricing vanilla options with non-lognormal underlyings returns. I'm tempted to start using MC as my primary option-valuating technique as I can get ...
8
votes
2answers
3k views

VIX = Vega of S&P500 options?

ok, so let assume I can predict the daily change in the VIX itself (in points) every day. what would be the best way to play this with OPTIONS? well, obviously VIX options, but if I can look at the ...
2
votes
1answer
2k views

Portfolio Greek Exposure Equations

What are the calculations for calculating greek exposures in a portfolio of equities and equity options? I think I have them but I want to be sure. Are these correct (for vanilla options)? ...
4
votes
2answers
2k views

Multi asset option portfolio risk management (greeks and FX exposure)

I am running an options book containing listed options across multiple products. I trade mostly equity and index related options - with a preference for European expiration products. I trade products ...
3
votes
1answer
534 views

Is there any evidence that an option delta approximates ITM expiry probability?

Several sources (online and offline) that discuss the delta of a listed vanilla option, state that its delta is a (guesstimate?) of the probability of said option expiring ITM (in the BSM framework). ...
2
votes
1answer
161 views

Brent Crude Data

I am trying to locate historical volatility data (5+ years) for Brent Crude? Does anyone know where I might be able to source such data?
2
votes
2answers
592 views

Why don't options traders use charts? Or do they?

Retail trading platforms typically offer equity charts but only instantaneous quotes on options. It seems like even a few minutes of historical data would be useful when entering an order. Are charts ...
2
votes
3answers
412 views

Basic question about Black Scholes derivation

In the derivation of the Black Scholes equation, the value of the portfolio at time $t$ is given by $$P_t = -D_t + \frac{{\partial D_t}}{{\partial S_t}}S_t $$ where $P_t$ is the value of the ...
0
votes
1answer
295 views

Exotic option pricing

I'm trying to price an option with payoff $\max\{a\cdot S_t - K,0\}$ where $a$ is a known constant. Ideally I'm looking for a closed form, continuous-time solution. Where should I begin?
8
votes
1answer
252 views

Prove or disprove “If at least 10% of an option's value is time value, it has a delta less than 90”

"If at least 10% of an option's value is time value (ie. time value >= 0.1*call price), it has a delta less than 90". In practice and after doing many tests with an option pricing calculator, this ...
15
votes
1answer
10k views

What is the best live options data API?

What is the best/cheapest service to get real-time (as real-time as you can get) on stock options? I'm looking for the fastest update on the ENTIRE market, with a few stocks prioritized, so I need ...
11
votes
2answers
4k views

Implied Volatility from American options (binomial)

I am trying to get the implied volatility from options on commodity futures and I know it's possible to get it from the binomial american options (on an non-dividend paying stock). I believe it is ...
5
votes
1answer
1k views

Science behind options pricing into Earnings event

I am wondering about studies regarding the uncanny options pricing into public company's earnings reports. The phenomenon being that the price of a straddle before earnings costs near exactly the ...
3
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0answers
108 views

Option symbol conversion [closed]

Maybe more of a programming question, Is there a Ruby gem to facilitate conversion of an option symbol notation from one form to another? For example, one source provides TZA1220J18 but an API for ...
6
votes
0answers
199 views

Arbitrage free price of a derivative when the price is collected over the lifetime of the derivative

Let $X_t$ be an american style financial derivative with random exercise time $T$ where $t$ and $T$ belongs to some finite set $A$. Buying this derivative requires the buyer to pay $p_t$ up to time $T$...
2
votes
1answer
671 views

Calculate historical (ATM) option prices with public data

I just saw the question How to calculate the most realistic historical option prices with additional publicly available parameters and I am interested in the step before that. How can I calculate ...
2
votes
0answers
81 views

Any thoughts on how Warren Buffet's B of A warrants might be “marked-to-market” by either counterparty?

It's not too long since Berkshire Hathaway got its 10-year warrants in Bank of America alongside its \$5 billion purchase of preferred stock. At the time I saw some discussion about the value of ...
17
votes
5answers
21k views

What is the implied volatility skew?

I often hear people talking about the skew of the volatility surface, model, etc... but it appears to me that a clear standard definition is not unanimously in place among practitioners. So here is ...
11
votes
5answers
1k views

Is it ever possible that---because of illiquidity---exercising an out-of-the-money option is better than directly buying the stock?

Is there a case, where due to illiquidity, exercising out-of-the-money options could be better than directly buying the stock? When a stock is too illiquid, there are some costs because of this ...
3
votes
0answers
207 views

How to find the upper bound of a digital option given some market data?

Given the price of a call equals to 5 with Strike 100, please find the upper bound (sup) of the digital option with strike 105. I am not sure about the solution, but I write the condition like this, ...