17 votes
Accepted

Gamma Pnl vs Vega Pnl

For an option with price $C$, the P$\&$L, with respect to changes of the underlying asset price $S$ and volatility $\sigma$, is given by \begin{align*} P\&L = \delta \Delta S + \frac{1}{2}\...
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  • 20.5k
13 votes

Stop-loss start-gain paradox: Why is it a 'paradox'?

I am one of the two authors of the paper. The continuity in time of the path of the underlying suggests that at every trading time, the strategy is self-financing. In fact, if the underlying random ...
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11 votes
Accepted

Is short-gamma inherently a losing strategy?

You can't lose more than you invested by writing covered puts, because you keep enough cash to cover any potential losses from the puts. That's not to say that your losses can't be substantial, of ...
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  • 5,628
10 votes
Accepted

Would it be possible to combine long butterfly with long straddle, achieving profit no matter the outcome?

Your butterfly is short a straddle and long a strangle. If you add a long straddle with the same strike/notional you are now just long a strangle. The payoff for a strangle is zero if the terminal ...
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  • 5,628
9 votes
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Why a calendar spread is a preferred strategy in a low volatility period

The main thing to keep in mind with all these different option combination strategies is that you are really trading option greeks! I think the answer to why the calender spread is so popular lies in ...
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  • 27k
8 votes
Accepted

What mathematical models did Harry Markopolos run to prove that Bernie Madoff 1% a month gain was a Ponzi scheme?

You can find everything you want to know about this here (and in a very readable and easily reproducible form): How Students Can Backtest Madoff’s Claims by Michael J. Stutzer (2009) From the ...
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  • 27k
8 votes
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What really is Gamma scalping?

Assuming all else remains equal (implied vol has not changed and very little time decay has occurred), Gamma scalping can best be explained by Gamma (or realized volatility) enhancing the value of a ...
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  • 5,335
7 votes

Implied volatility of a complex options position

You can guesstimate by vega weighted implied vol. This is why: Say that you have a portfolio of options with prices $P_j$. Each one of them has a different pricing function $f_j$ (as function of vol) ...
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  • 4,237
7 votes

What really is Gamma scalping?

Gamma scalping (being long gamma and re-hedging your delta) is inherently profitable because you make 0.5 x Gamma x Move^2 across the move from your option. (You get shorter delta on downmoves, so you ...
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  • 221
7 votes
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Replicate a Portfolio with Given Payoff

Consider the case where we are interested in decomposing a continuous and piece-wise linear European payoff function $V \left( S_T \right)$ over $n$ intervals with $n + 1$ node points $S_i$ for $i = 0,...
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6 votes

What really is Gamma scalping?

As long as you live in a world where implied and realized vol are the same, there is no net profit (or loss) from gamma scalping. However, if they are different, then you make a gain or loss which is ...
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  • 794
6 votes

Gamma Pnl vs Vega Pnl

Not sure this is a valid question! Gamma p/l is by definition the p/l due to realized volatility being different from implied. Vega p/l is by definition the p/l due to moves in implied volatility. ...
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  • 14.1k
5 votes

Are there any good tools for back testing options strategies?

Providing my 2 cents here, listing 3 free methods below: CBOE's method: No code here, just a "white paper", thus you can code it with whatever language you desire. I kinda like this the ...
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5 votes
Accepted

Books on options trading with a practical bent?

In my opinion there is one modern author on the subject of practical options trading who stands head and shoulders above the rest, and that is Euan Sinclair. His most recent book is Volatility ...
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  • 14.4k
5 votes

Why are there so many S&P 500 call options selling with strike @1000?

I'm also currently working on analyzing option-implied RNDs. I'm no expert but a couple of comments: In addition to volume, you want to look at the open interest of the different strikes to conclude ...
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4 votes
Accepted

Exercise on American call option and dividends

When dividends are continuous, they are essentially negative interest rates, so you should price options w.r.t. new interest rate $\hat r := r-d$ where $r$ is the original interest rate and $d$ is the ...
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  • 1,484
4 votes
Accepted

Mysterious disappearance of options from historical datasets

The data has definitely not disappeared, it's a problem with your vendor. There has been a corporate action on 2014-02-27 and hence the strike prices have been adapted accordingly. According to ...
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  • 975
4 votes

Why/How does a hedged portfolio make profits?

An Investment Bank earns a profit by selling you an option at a slightly higher price than the theoretical price, or buying it back from you at a slightly lower price. They call this "earning a spread"...
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  • 9,117
4 votes

Implied volatility of a complex options position

First note that implied volatility only makes sense with respect to an etablished pricing model, like the Black-Scholes or Bachelier model, and it is the quantity which has to be put into a closed ...
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  • 614
4 votes
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Shorting an option every day vs shorting only at maturity

Draw a picture. For each scenario, there are obvious circumstances that the payoff for each would be better. For the N day option, the payoff would be better if there was a slow gradual decline in ...
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  • 709
4 votes
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What instruments help me receive a premium?

no, generally speaking only options has time premium. I strongly advise you to avoid mixing 2 positions (short 1 option, long another one) in your mind just because they are independent, so just ...
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4 votes
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How to understand the no call or put spread arbitrage condition

Let's focus on a European call option for the sake of the argument. Assume deterministic rates to keep notations uncluttered. Define $\Bbb{Q}$ as the probability measure associated to the money market ...
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  • 14k
4 votes

Stop-loss start-gain paradox: Why is it a 'paradox'?

The strategy seems to be self financing because the investor's only actions are to buy stock in the market when the stock price increases to the exercise price K, simultaneously borrowing K dollars, ...
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  • 14.1k
4 votes

Swaptions Gamma Interview Questions

Using Taylor polynomials of 2nd order:$$V(r+h)\approx V(r) + \frac{\partial{V}}{\partial{r}}h +\frac{1}{2}\frac{\partial^2{V}}{\partial{r}^2}h^2$$ $$V(r-h)\approx V(r) - \frac{\partial{V}}{\partial{r}}...
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  • 241
4 votes

Is there an advantage trading options based on deep in the money Open Interest Volume ratio

I don't mean to suggest such a large topic, but it would certainly be worth reading about delta-hedging with regards to your question. Since such a large percentage of options are delta-hedged, the ...
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4 votes
Accepted

What are an option's "tested" and "untested" sides?

Having a position "tested" or "stressed" is trader jargon for "an assumption I made when entering the position is turning out wrong and I am losing money" or "the trade is going the wrong way at the ...
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  • 9,617
4 votes

Why are these deep in-the-money FLEX options seemingly bought at a discount?

SPY pays dividends ~1.8%, and the expiry is ~3y (as of date was 2018, 2021 expiry), so the it looks like there is a discount Assuming $0 time value $$OptionValue=Intrinsic Value+Time Value $$ $$...
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  • 371
3 votes
Accepted

Option arbitrage with dividends?

Fact 1: if you are not good at pricing options, of course you can create a lot of arbitrage opportunities for the rest of the market. It does not matter whether the reason is in dividends or anything ...
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  • 1,484
3 votes

Short volatility strategy using strangles

Generally, when you are short volatility, the 'size' of your position is measured using Vega. You have volatility risk, and that risk is Vega. In fact I am not even sure what it means 'to earn a ...
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  • 9,117
3 votes

Short volatility strategy using strangles

The risk of a short strangle is theoretically infinite, and the max return is fixed (the premium received on the 2 legs). This remains true whether you target max return or max vega.
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  • 1,354

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