Questions tagged [spread-options]
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49
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Searching for a paper on CMS Spread Option normal model price formula
Apparently if we assume that each underlying CMS rate is normally distributed then a formula for the CMS Spread Option price can be evaluated analytically in the absence of any contingency due to the ...
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1
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Calendar spreads through variance swaps
Please refer to this image from the famous paper JUST WHAT YOU NEED TO KNOW ABOUT VARIANCE SWAPS by Bossu et al. 2005 (page 6).
The underlined part, is there a typo?
"if the 2-year IV is above 20....
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Pricing illiquid CSO with Monte Carlo
I'm trying to price a CSO on Soyoil. The instrument is extremally illiquid.
To proceed, I simulate both leg by Monte Carlo, using the historical correlation over the 75past days and their respective ...
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What are the pros/cons of using a copula model to price CMS spread options, in particular ones with short expiries?
The expiry of the option may not be relevant to the question, but I would be curious to know if a copula model would provide an accurate price for sub 6 month expiry options.
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Calendar spreads under black scholes world
If IV skew is flat (all strikes with the same IV ss ATM) as in the black-scholes world for all maturities, would calendar spreads be considered as pure arbitrage?
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333
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Pricing European Call Closed Form Spread Options in Python
I am currently trying to correctly price European Call Closed Form Spread Options using Python. The main problem I am currently running into is that I have nothing to compare the option price so that ...
2
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2
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406
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Intuition behind calendar spread max loss
With a calendar spread (buying back, selling front), max loss is defined as some variant of "maximum potential loss is the cost of opening the trade (Premium Paid − Premium Received = Total Debit)...
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2
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399
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Why is Implied Volatility more important than skew for put spread pricing?
It is said on page 26 of the book "Trading Volatility: Trading Volatility, Correlation, Term Structure and Skew" by Bennett (2014) that:
A rule of thumb is that the value of the OTM put ...
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Interesting finding... "Adjusted Kirk's" and "Bjerksund-Stensland" are exactly the same ??? Spread option calculation
This is more of an academic question. The results are SO close, I think they are ACTUALLY THE SAME FORMULAS. So someone published a paper with a "new" method to adjust Kirk's formula to ...
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Is there an equation that gives you the optimal spread width or strike prices when opening a vertical options spread?
On a specific leg, when going to open a spread is there an equation that can tell me at what strike price I should sell at and what strike price I should buy at?
I look at this options calculator ...
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166
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Why does bull call spread shows higher payoff than bull put spread?
I am trying to compare bull call spread and bull put spread for equity index option. For the options where the put call parity holds, I am getting a different payoff for bull call spread and bull put ...
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Valuing Option Credit Spreads
I'm trying to come up with a metric to value and compare spreads. One way that I was doing this was to compute the Expected Value of the spread.
To calculate the expected value I used the following ...
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1
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Delta and Gamma profile
There is an active spread option traded in ICS as described here - https://www.theice.com/products/28881205/Crude-Future-Brent-1-Month-Calendar-Spread-Options
I am ...
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2
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807
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Change of numéraire for two risky assets without bank account (Margrabe’s formula?)
I am considering two risky assets following the usual correlated GBM given by
$$\frac{\mathrm{d}S^{(i)}_t}{S^{(i)}_t}=\mu_i\mathrm{d}t+\sigma_i\mathrm{d}W^{(i)}_t,\quad i\in\{1,2\}$$
with
$$\mathrm{d}...
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384
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Call spread hedge
I'm trying to understand how a call spread is used for FX hedging. The example that my book gives is when we have USD receivables in 12 months which we want to convert to EUR and we want to hedge ...
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2
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363
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Vertical Spreads : Long/Bull Call vs. and Short/Bull Put?
I modified Kevin Ott's Call Debit Spread and Put Credit Spread payoff graphs that appear similar.
1. Doubtless I can see that the former debits you, and the latter credits you. But how else do these ...
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Vertical Spreads : Short/Bear Call vs. and Long/Bear Put?
I modified Kevin Ott's payoff diagrams from Call Credit Spread and Put Debit Spread that appear identical.
1. Doubtless I can see that the former credits you, and the latter debits you. But how else ...
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176
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Should I hedge this spread with a spread option or an insurance product?
My firm generates electricity from wind. Accordingly, most of my generation takes place at night, when prices are low -- and, due to congestion / oversupply, often sharply negative -- so much so that ...
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2
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Can't losses from Long Puts always be reduced, by turning them into Put Credit Spreads?
Presuppose that
on May 1 2020, you bought 1 BA 90P 6/19/2020.
BA rocketed back to $205 as at 6/7/2020, and you no longer expect BA will drop back to \$90. Now you solely desire to minimize your ...
0
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1
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243
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Butterfly spread calls and puts
I am trying to understand the butterfly spread. My book (ASM Study Manual for SOA Investment & Financial Markets (IFM) Exam) says one of the ways to write it is:
Long put, strike $=K-c$
Short ...
3
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2
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422
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Margrabe option: change of numeraire versus conditioning and numerical integration
I am having a slight brain meltdown because I do not seem to be able to understand the following basic thing.
Consider a BS economy, and two assets $X$ and $Y$
$$
dX = \sigma X dW
$$
$$
dY = \nu Y dZ
...
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188
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Construction of Butterfly Spread as sum of Call Options
I have rigorously stated my problem here.
The task at hand is to express a butterfly spread [no transaction fees] as a sum of long and short call options.
I have found the solution on Wikipedia:
$$\...
3
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1
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517
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Boundaries for Call Spread
I'm reading an interview book called A Practical Guide to Quantitative Finance Interview and I have some doubts regarding part of its solution and highlighted them in bold:
Question:
What are the ...
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1
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114
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Variance of a spread for options on spreads
I was reading the paper:
https://people.umass.edu/nkapadia/docs/Negative_Vega.pdf
In the equation $(5)$, he is defining the variance of the spread as:
$$\sigma_1^2S_1^2 + \sigma_2^2S_2^2 - 2\...
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249
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Kirk's formula when strike is negative
Does anyone have experience with pricing spread options with potentially negative strike using Kirk's approximation?
I always see Kirk's price approximation used for positive strikes, but as far as I ...
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1
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6k
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What is CMS Spread Option Single Look? In what ways is it different from CMS Spread Cap/floor?
What is CMS Spread Option Single Look? In what ways is it different from CMS Spread Cap/floor?
Also, what's strike shift? What's its function in CMS spread options' pricing?
Thanks.
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158
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Spread vol for interest rate spread options in normal environment
Suppose I am long spread option with underlying : rate A - rate B. The vega on the option would be positive. But if I want to compute the option vega with respect to individual rates, can I use the ...
2
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0
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74
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Correlation of spark spread
I am following this paper (Deng, Johnson, Sogomonian: Spark Spread Options and the Valuation of Electricity Generation Assets, 1999) to understand spark spread option valuation.
On Page 4, it has <...
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459
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Understanding delta based strike selection in an Iron Condor
I am reading a small book on the proper use of Iron Condors (link). I do not use these strategies as I have had a very hard time being profitable on them. This book mentions some strategies to ...
2
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Bjerksund and Stensland model, reasonable minimum value for Volatility?
I am looking at an implementation of Bjerksund and Stensland (2006), and notice that it doesn't work well for very small volatilities. What is a reasonable minimum volatility to use in an algorithm ...
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How skew in vertical put spreads change the payoff?
An spx four strikes wide Put Spread from at the money has a payoff ratio of 1 to 2 meaning if the Premium on the spread is \$10 your reward is \$20; yet the corresponding Call Spread with the same ...
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How can we compute copula functions by using Fast Fourier transformation?
Q1. If a copula is expressed in terms of its moment generating function then how can this copula can be computed by using Fast Fourier Transformation?
Q2. Can we use copula to evaluate spread option ...
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Using a call-spread to hedge a digital option
I have a digital option that pays out \$1M at time $T$ if the price of the underlying stock is higher than \$1300 (with current price ~\$1000) and, obviously, zero otherwise. I am in the Black-Scholes ...
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How to price a strategy involving more than 2 different prices?
When pricing a spread option with two different prices, one can use Kirk's approximation combined with Margrabe's formula (https://en.wikipedia.org/wiki/Margrabe%27s_formula).
But what if I am ...
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Bull spread problem [closed]
I am new to finance math and I would like to know if my approach to this problem is correct
Consider the following three European call options, all with expiration at time $T$ = 1:
Option $A$ has ...
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Is it possible to hedge Spread Risk on a Forward Swap?
You can enter a forward swap to eliminate interest rate risk, but the spread risk still exists when the swap actually goes into effect. My goal is to convert a floating rate credit facility that will ...
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How to calculate the volatility of a equity option spread
I would like to calculate the volatility of an equity option spread with all legs having the same expiration.
Reading Option Volatility and Pricing 2nd Edition by Natenberg, Chapter 20, section ...
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Valuating Prepayment on Loans- Which models are favorable?
I have some trouble in choosing the right method/model for the valuation a prepayment option on a loan (in General).
So far I had some ideas about valuatiing it via a simple PV-method but there ...
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What is a Constant Maturity Swap (CMS) rate?
I have been searching in books and on the internet for a basic definition and explanation of CMS rates, but I cannot find anything clear and simple. Can you explain (maybe with an example) what a CMS ...
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Calendar spread: What are the worst cases?
I am looking to solely make use of the theta decay and trying to overcome the effects of delta and Vega.
If,
I sell ABC Feb OTM (strike price X) with 3 x 10 = Rs. 30 credit and buy ABC Mar OTM (...
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248
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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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Why a calendar spread is a preferred strategy in a low volatility period
What is it about a calendar spreads opposed to other spreads (e.g vertical spread) that makes it such a popular strategy for a period of low implied volatility?
Is it that when low volatility turns ...
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Spread options on prices or returns?
I need some clarifications regarding spread options. I have always found them characterized as paying, at maturity, the difference between the prices of two underlying assets:
$$ (S_1(T)-S_2(T)-K)^+ $$...
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How to price a futures spread option?
Let's say I have two futures contract $F_1(0,T)$ and $F_2(0,T)$ on two different correlated underlyings.
If I assume that both underlying follow a GBM with volatility $\sigma_1$ and $\sigma_2$ ...
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3
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Can we trade option spreads with more than 4 option legs?
I am wondering why most online brokers restrict multi-legged options spread trades to have a maximum of four legs?
Also, is there a broker that allows you to trade say 6 or 8 legged option spreads.
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IB API quotes and speed
The title says it all. I trade futures options exclusively and wanted to see if anyone had insight into the quote speedsrobustness coming into the API. I'm using the Excel DDE right now just building ...
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What is most reasonable approach to determine side of a multi-leg options order?
Say, 4-legged multi-leg options order with below leg
...
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727
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Risk Neutral Evaluation - Exchange/Spread Options
I have two assets, $S_1$ and $S_2$, which follow geometric Brownian motion processes. This implies that both $S_1$ and $S_2$ have a lognormal distribution.
I'm trying to get the exchange option price ...
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653
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Correlation decay in lognormal distribution
I noticed that if you use two correlated geometric brownian motions, the correlation structure decays in time pretty fast even for really high correlation values.
I think that is not replicating ...