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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1answer
83 views

Option data analysis

This question is regarding the following tweet: https://twitter.com/yuriymatso/status/1281730109141954561 How was the original tweeter able to know that "Someone made a ...
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1answer
173 views

How to identify market makers in an orderbook?

I am trying to identify markets makers within an (options-)orderbook. Of course, this is far stretched, but I was wondering what kind of characteristics / patterns I should look at. I got the ...
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225 views

Intution behind buying the option when implied vol seems low

Hi All: I've started reading "volatility trading" by Euan Sinclair and it's a very nice book. It's not so theoretical but instead focuses on the practicalities when dealing with trading ...
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1answer
42 views

Confusion about optimal choices with exotic options

With exotic options, holders usually face choices at certain times. In my understanding, the price of the option is determined by assuming the optimal choice is taken and computing the discounted ...
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1answer
76 views

Free or cheap data source for the current European Options prices?

Is there a free or cheap (<15$/month) data source for the current (not historical) for European Options? Something like Yahoo Finance option page, with option chain contract prices. It's ok if it's ...
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1answer
60 views

Realizing profit with Gamma Trading doubt

Lets suppose we have a delta-neutral portfolio and that we want to trade the gamma. If we are long gamma, we can profit from every rebalancing to keep the portfolio delta-neutral. Lets suppose the ...
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38 views

Reference request for equity index gamma modeling

I read this article a while ago https://www.zerohedge.com/markets/all-you-ever-wanted-know-about-gamma-op-ex-and-option-driven-equity-flows and i've found a lot of success trading options using these ...
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47 views

Confusion about American style option

In American style exotic options, the holder is often faced with choices at certain times during the life span of the option. Following the/an optimal choice allows the user to maximize the value of ...
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1answer
203 views

Why doesn't Variance-Gamma process flatten volatility skew for short term options?

The Variance-Gamma (VG) process, from my inexpert point-of-view, seems to nearly perfectly model equity distributions. For longer term options, there is little to no volatility, skewness, or kurtosis ...
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160 views

Simulating assets of different currencies

I have a situation as follows: One year call option on a Euro stock with a Euro denominated strike. Knock in feature as follows - The option can only pay out if the growth in the Euro stock over ...
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54 views

How does most Forex options work? What is the most liquid or popular type of forex options?

For the "mainstream" forex options for example those (in the size of bn) posted on this site: https://www.forexlive.com/orders/!/fx-option-expiries-for-thursday-july-02-at-the-10am-ny-cut-...
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2answers
697 views

“The potential gain of a Call Option is always incorporated in the Option's price” - Why is that?

I've heard this but I don't understand why. The demonstration of this is that the Ask Price of a Call Option is always higher than the difference between the Strike Price and the price of underlying ...
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6answers
405 views

What is the benefit of holding a short option?

I am new to corporate finance and I ask myself why an investor is interested in being short an option? He can only can win a premium but he can lose much more. I understand with being a short, I cap ...
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2answers
143 views

Effect of correlation on a best-of rainbow option

EDIT 2: I found the problem(s) and the prices seem to behave as expected now. For anyone interested there was a bug when normalizing the dependant ranom normal variates used in the simulation, so ...
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2answers
294 views

Why are interest supposed deterministic for equity?

I don't see why would rates be considered as deterministic when trying to price $\mathbb{E}^{Q} \left[ e^{-\int_{0}^{T_{f}}r_{s}ds} \left( S_{T_f} \right) | \mathcal{F}_{0} \right]$ I would like to ...
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70 views

Graph of a down-and-in barrier option

Here is a graph of Price vs Spot from Joshi's Quant Interviews book, The first line is a down-and-out barrier option and the other one is a down-and-in barrier option. The strike is 100 and the ...
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45 views

What is the typical work-flow and skills/techniques required for someone working on Structuring Products?

Are there any Portfolio Optimization techniques (Markowitz, Prospect Theory, etc...), valuations and derivatives hedging techniques? What is a typical workflow and what should one master?
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1answer
60 views

FX pricing replication

Pay in currency : cur The FX is : $FX^{cur_2/cur_1}$ European options on the FX (and itself) are quoted in currency cur 1. I'm looking for the price of \begin{equation*} \mathbb{E}^{Q} \left[ e^{-\...
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2answers
201 views

What is the economic reason for the equality in value of an American call and European call?

In a previous question this question came up. In my mind, if I'm holding an option at time t, then there are possible future price paths where at t+k the option will be ITM but at T the option will ...
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19 views

2 Equity with different currencies and different fixing dates

Given Pay in currency : cur european options on the underlying 1 (and itself) are quoted in currency 1 with fixing date 1 european options on the underlying 2 (and itself) are quoted in currency 2....
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54 views

Dispersion Trading with a 2 component index

I have a dispersion question I need help with...An index SPY has only 2 components - AAPL and AMZN. We are given the implied volatility of SPY and AAPL as well as the correlation between the 2 assets. ...
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63 views

liquidity of a portfolio of options

In the asset management industry, many reports contain liquidity metrics such as the no. of days to liquidate 95% of a position, based on a certain participation rate. If that position is a stock or a ...
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1answer
94 views

Simple approach to interpolate option surface

Let's set the spot price as 1 (spot price of underlying security) and express each option contract as a point in 3D space $$ \{ x, y, z \} = \{ tenor, moneyness, premium \} $$ where the premium is ...
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57 views

How to price a down-and-out leveraged barrier call option using Brownian motion?

I am trying to price a type of leveraged down-and-out (LDAO) barrier call option, using geometric Brownian motion. My python script is below. I am not sure how to correctly model the increasing ...
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1answer
85 views

Implied volatility of hypothetical options market

I am attempting to create a volatility surface for a US electricity market that has a liquid futures market but nearly non-existent options market (<5 trades per month across all strikes and ...
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1answer
44 views

Delta-normal VaR of portfolio of stock and call option

I have to calculate the 10-day 99% VaR of a portfolio that consists of a portfolio of 260 stocks of a company $K$ and that is short 500 call (European) options of the same company. I know that the ...
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50 views

Can option chain data be used as a quick and dirty substitute for proper pricing calculations for non-traded options?

I wonder if the option chain data that is published everyday by websites like Yahoo finance can be used to quickly price options that are not yet traded? So in other words, to estimate option prices ...
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62 views

Estimating risk aversion from option bid-ask spreads

Is it possible to use bid-ask spreads on contracts from a specific tenor to estimate risk aversion and use it to transform risk-neutral density into real-world density?
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88 views

How does high IV effect a put backspread?

I have a hard time understanding how high IV effects the amount of gamma obtained via a put backspread. Is it via the angle on the payoff or via the ratio one gets i.e number of OTMs one can buy? or ...
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1answer
101 views

Estimating optimal exercise boundary for an American call by LSM method

I'm trying to derive optimal exercise boundary using LSM method and got some weird outcome. So, I evaluated an American call option by LSM method and now need to find the optimal exercise curve. Do I ...
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1answer
68 views

Kurtosis of a straddle

I want to determine the kurtosis of a straddle. My question is closely related with the following topic here. According to the following paper of Ben-Meir and Schiff (2012) the expected value of a ...
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2answers
110 views

Calculating Implied Volatility from a put option

I am trying to find the Black-Scholes implied vol from a put option. I know how to do this in the case of a regular put option on an underlier $S(t)$ where $$ p(t, K) = e^{-r(T-t)}\mathbb{E}_Q\Big[ (K ...
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86k views

A simple formula for calculating implied volatility?

We all know if you back out of the Black Scholes option pricing model you can derive what the option is "implying" about the underlyings future expected volatility. Is there a simple, closed form, ...
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2answers
166 views

How much money would it take to artificially inflate/depress a stock?

Please include links or at least keywords to research papers if possible. This is basically an investigation into max pain / stock pinning and what it would take for a hedge fund to cause it. Some ...
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0answers
47 views

Pricing/Hedging a yield curve spread option (YCS)

I have 2 perspectives as to what model to use for a YCS option: It is an at the expiry option, so hit the marginals, correlate them with a copula, and be done with it. To hedge the vega, I will need ...
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0answers
30 views

Does equity premium puzzle affect option-implied RWDs using Arrow-Debreu equilibrium?

I am researching and learning about option-implied RNDs (risk neutral densities) and transformation to RWDs (risk world densities) using expected utility theory to compute risk aversion values. This ...
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62 views

R: How do i finish the tails in the risk neutral density, obtained from option prices

Im currently working on constructing the risk neutral probability distribution of a stock, based on the option prices. In doing so, i calculate the implied volatilities from the option prices, and ...
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1answer
122 views

Understanding the notion of future options

I am currently studying different types of option-related derivatives and I am quite confused about the notion of “futures options”. My textbook says that A futures option is the right, but not ...
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2answers
121 views

May someone please explain the intuition behind the Black-Scholes Equation?

Consider the Black-Scholes equation for a European Call Option, \begin{equation} \begin{cases}\frac{\partial V}{\partial t} + \frac{1}{2}\sigma^2 S^2 \frac{\partial^2 V}{\partial S^2} + r\frac{\...
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87 views

lead lag relationship among futures, options and stock prices

I have the data of past 10 years of NIFTY (the National Stock Exchange of India) stock, futures and options and I want to show the lead-lag relationship (which reacts first, futures, options or stocks)...
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1answer
146 views

How to find characteristic function in Fourier Cosine method (COS method) by Fang and Oosterlee

Fang and Oosterlee (2009) introduced Fourier-Cosine method (COS method) in their paper. The formula to price an option is approximately $$e^{-r\Delta t} \sum_{k=0}^{N-1}' Re\left\{ \phi\left( \frac{k\...
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2answers
679 views

Valuation of Bermudan option as maximum of relevant European options

Assume I need to price a Bermudan option which can be exercised at following dates: $t_1$, $t_2$, ..., $t_n$. I think that the price of such an option will be maximum of the prices of European options ...
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1answer
141 views

Bermudan option exercise probability when rates rise

I am looking for an explanation of what happens to the Bermudan exercise probability (i.e. does probability of early exercise go higher if rates rise or lower) w.r.t rates. This is of course with ...
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1answer
2k views

Pricing a double barrier option using Monte Carlo (C++ & Python code included)

I'm trying to price an option with upper and lower barriers using MC where the payoff is $B_u$ when $S_t > B_u$, $B_l$ when $S_t < B_l$ and $S_t$ when $B_l < S_t < B_u$. I have written ...
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49 views

Options pricing model inversion

He cited about Roll's compound formula for finding the lead-lag effects between stocks and options. I have a similar data for National Stock Exchange's Index, NIFTY but it's daily, not intra-day. I ...
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1answer
73 views

Under what conditions will both European and American put options worth the same?

It is well-known that on a non-dividend paying stock, it is suboptimal to exercise an American call option earlier. In other words, both European and American call options on the same non-dividend ...
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375 views

Estimation of Risk-Neutral Densities Using Positive Convolution Approximation - Python

I'm trying to estimate the risk-neutral density through positive convolution approximation (introduced by Bondarenko 2002: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=375781). I'm currently ...
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1answer
65 views

What are the differences between hedging with swaps, options or futures? [closed]

For instance if a bank wants to hedge against interest rate risk, it could use interest rate swaps, or options or futures contract. Or in any other example, when a manager is hedging against risks. ...
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41 views

Question about greeks and put options

I am trying to establish the relationship between put options and greeks through a general form problem. Suppose that there is a company that at market opening trades its shares at a price $p_1$.Now ...
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1answer
407 views

Barrier Shifts - necessary for up-and-out call / down-and-in put?

Recently I came across the topic of barrier shift for barrier/digital options. I found that most examples centred around down-and-in puts / up-and-in call / digitals. I am wondering if we need ...

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