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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hedging of a spread option with call

We have 2 underlying $S^{1}$ and $S^{2}$ with BS dynamic under the risk-neutral measure (r constant...) I found the (big) PDE satisfied by the price function $u(t,x,y)$ of a call spread whose payoff ...
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824 views

Delta Volatility Surface Usage to value the option

I always find myself in the unknown charted territory when it comes to non-Linear Instruments. I come across the scenario, How to value the option using Delta Vol surface? Example I have CME traded ...
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217 views

Discrete Hedging of Options

Assume that a stock $S_t$ follows simple geometric Brownian motion. Let's say we sold option whose payoff is $f(S_T)$. Now, we are only allowed to trade 2 times in the interval [0,T]. What kind of ...
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86 views

Benchmarking option pricing under stochastic interest rates

I priced a long-term option (10 or 20 years) using two different models: one assumes constant interest rates, the other assumes stochastic interest rates. Is there a way (e.g. a benchmark) to ...
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170 views

negative probabilities in the bivariate tree heston model

I am trying to implement the bivariate tree approach for the Heston model by Beliaeva and Nawalkha. I currently have the problem that given the specifications in their examples, I always obtain ...
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1answer
54 views

Black Scholes Replication If Underlying Does Not Move?

Let's say you are long a call and want to replicate that call buy being short underlying and long bonds. If the underlying moves up in the next period but not enough to cover theta, the option ...
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74 views

transaction costs for day trading options

I want to day trade SPY options by buying at the open and closing the position later in the day, but I need to know approximately how far into the money the contract will have to be for me to break ...
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1answer
288 views

Why does option pricing not depend on probabilities in a binomial tree style valuation

I am new into learning option pricing and read that option pricing using binomial valuation does not depend on probabilities (real or risk neutral). Example: A 1 period binomial tree with $u = 1/d = ...
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257 views

Computing loss of Call / Stock Purchase

A seller of an European Call, can, subjectively have unbounded losses. This loss may be mitigated by buying the stock (covered call). In this case,, the loss will be bounded at A. How would one ...
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126 views

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?
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1answer
47 views

HEDGING WITH A PUT OPTION

In the following example, for 3rd question and 4th question why do we have to add (Stock price in three months - Current stock price) to put option profit? Thank you in advance.
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114 views

Why is accuracy important in pricing American Options?

I see a lot of academic papers talking about accuracy in pricing American Options (and finding analytic solutions). Why is there so much interest in this topic? Isn't the option price set by the ...