3
votes
Selling Strangle or Selling Straddle
There's a reason why the otm IVs are higher to begin with.
Market moves/returns exhibit kurtosis. This implies most of the time they move in a confined range, from time to time they exhibit very large ...
- 71
3
votes
Selling Strangle or Selling Straddle
This is a bit like saying it's "a superior strategy" to lend $100 for 2 years rather than for 1y year because you earn twice as much interest. The skew premium is there to reflect ...
- 986
3
votes
Decomposing option payoffs
A good strategy to find the decomposition is to first look at the graph of
$$
\max(\min(S-1,2-S),0)\,.
$$
It looks like a
long call with strike $1$ plus
2 times short a call with strike $1.5$ plus
...
- 1,958
3
votes
Accepted
Options market making process (step-by-step)
It's not clear from the question, but there are two scenarios:
1/ you have an actively traded and well-established options market in which you're going to get involved as a new participant and take on ...
- 986
2
votes
Accepted
Optimal Fitting Criteria of SABR
In practice (at least in the rates world), $\beta$ is preset and $\alpha$ is solved for to calibrate to the atm vols $\sigma_{ATM}$ (which are the most liquid and reliable of the market data available)...
- 986
1
vote
Can someone provide an example of how arbitrage would be used when an american call option can be bought for less than max(final stock - strike,0)?
Merton writes
Further it follows from conditions of arbitrage that
$$\tag{3}F(S,\tau;E)\ge{\rm Max}(0,S-E)\,.$$
In general , a relation like (3) need not hold for a European warrant.
This is the ...
- 1,958
1
vote
Accepted
Using Cubic Spline with Vol Skew for Equity Options in R
Posting my comment as an answer :):
Could you post an example of your problem? If you have positive volatilities and interpolate between them, then the interpolated values should be positive too (also ...
- 13.6k
1
vote
What does it mean with regards to market conditions that the historical volatility is twice the implied volatility
Factually, it means that traders are pricing options as if they were less volatile than what actually happened in the past.
It's easy to conclude that this means people generally believe the ...
- 111
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