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7 votes

Intuition behind calendar spread max loss

This is not necessarily true. Take a high dividend paying stock (10%) for example. If deep ITM, you would have a loss higher than the initial cost for european options, or face an early exercise for ...
AKdemy's user avatar
  • 9,079
7 votes

Questions on options cost of carry, and relationship to futures cost of carry

Both answers already address the gist of the question. I decided to add (quite) some details because I think there is some confusion from the OP. It is not the future that has carry costs or benefits ...
AKdemy's user avatar
  • 9,079
6 votes

Questions on options cost of carry, and relationship to futures cost of carry

I think it's best if we go through the various terms that appear in your question and explain them one-by-one. Derivative price: intuitively, a derivative price is what it costs to "create it&...
Jan Stuller's user avatar
  • 6,118
6 votes

Discounted price of an option

The process $Y_t:=(S_t-K)^+$ cannot be the price of a traded asset because of Jensen's inequality. Instead, it is the price of the option which is a martingale. In the Black-Scholes model, the ...
Daneel Olivaw's user avatar
6 votes
Accepted

Bloomberg terminal option data calculation

You can use Bloomberg to get the bulk of work done for you: If you load the ticker in OVME L, you load the OTC pricer OVME in listed mode. That will also load the ...
AKdemy's user avatar
  • 9,079
5 votes

How to price very short dated options?

In interest rate options you can observe the behavior of listed options on bond futures on the last day before expiration. What I’ve noticed: (A) the most important consideration is whether there are ...
dm63's user avatar
  • 17k
5 votes

interest rate, dividend rate data for black scholes model

The interest rate can be derived from put call parity. A number of questions about how to do this have been asked, for example this one but look at related questions as well. For European options ...
Bob Jansen's user avatar
  • 8,543
5 votes

interest rate, dividend rate data for black scholes model

The experts on this issue are the people at the CBOE who compute the VIX volatility index. I suggest you use the same methodology described in this document Cboe Volatility Index Mathematics ...
nbbo2's user avatar
  • 11.2k
5 votes

Optimal delta-hedging frequency when gamma scalping

The model I quite like as a base-case/rule of thumb is the Hoggard, Whalley, and Wilmott (1994) model. Assuming GBM - the number of shares, $N$, per interval is: $$N = Δ(S+dS,t+dt)- Δ(S,t)≈ Γ*dS$$ ...
Newquant's user avatar
  • 769
5 votes
Accepted

Why are option bid and ask option prices aggregated by 0.05

According to CBOE: Premium Quotation Stated in decimals. One point equals \$100. Generally, minimum tick for options trading below \$3 is \$0.05 and for all other series, \$0.10. For classes ...
AKdemy's user avatar
  • 9,079
5 votes

systematic trading reading fixed income

AQR Capital Management has a number of good papers on the general topic of systematic investing. In particular, you might find "Systematic Credit Investing" by Frieda and Richardson (easy to ...
Sharad's user avatar
  • 1,181
4 votes
Accepted

Calculating skew for an options structure

There are many definitions / concepts of skew. For a good overview of 'skew' you might like Mixon, What does implied volatility skew measure? What you have done in your example is calculate the slope ...
Frido's user avatar
  • 1,874
4 votes
Accepted

How does the inclusion of stochastic volatility in option pricing models impact the valuation of exotic options?

Check out https://www.sciencedirect.com/science/article/pii/S0898122112003215 for barriers, think some searching could yield similar papers for Asian options. In practice this kind of stuff is mostly ...
QuantNero's user avatar
  • 233
4 votes
Accepted

QuantLib: Analytical Greeks and Numerical Greeks do not match?

How close the numerical Greeks are to the analytic Greeks depends on how one calculates them. The analytic Greeks correspond to the mathematical derivatives, so in general smaller increments should ...
Luigi Ballabio's user avatar
4 votes
Accepted

Relationship between options open interest and spot price movement

I think what you describe makes sense, at least loosely. This paper finds evidence of a mechanism that seems quite similar to what you describe. They write: "The potential mechanism is that ...
fes's user avatar
  • 1,717
4 votes
Accepted

Can the risk neutral pdf derived from Breeden-Litzenberger Method be used to calculate vega and theta?

No, vega cannot be derived in a model-free manner. The reason for this is because in contrast to delta and gamma, there are multiple definitions of vega, and an even deeper underlying reason may be ...
Frido's user avatar
  • 1,874
4 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 ...
user35980's user avatar
  • 1,366
4 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 ...
user68819's user avatar
  • 360
4 votes

Wrt speed, how optimised is QuantLib's Heston pricing class?

QuantLib does a lot of things behind the scenes that provide convenient functionality but get in the way of pure speed. For instance, in your example code, when you write ...
Luigi Ballabio's user avatar
4 votes

Why do one's current holdings matter when selling calls?

Another way to look at it is that with a covered call, the stock is already in the box and so if they are called away from you, you will not have to buy the stock in the open market and therefore have ...
AlRacoon's user avatar
  • 6,262
3 votes

Best tool to find an optimal option?

This makes little sense. An option with the same strike, does not get much more expensive if you add a day to expiration. However, if you divide by the number of days, you reduce the value of the ...
AKdemy's user avatar
  • 9,079
3 votes

If American Options always have positive time value, how can it be optimal to exercise an American Put early?

“How is it ever optimal to throw away positive time value?” Answer: when the thing you are throwing away is less than what you are gaining through the early exercise . What is that ? Interest you ...
dm63's user avatar
  • 17k
3 votes

Intuition behind calendar spread max loss

Based on the clarification in the comments, I would give the following reasoning: If the stock price moves far away from the strike in either direction, then the maturity of the call option matters ...
Hans-Peter Schrei's user avatar
3 votes

Comparison of the American and European call deltas

This is true, $\frac{\partial}{\partial S}C_\text A(S,0)\in [0,1]$ and that the difference is bound above. Proof: Suppose $S\ge 0$ follows a local volatility process $$dS(t) = \sigma(S(t),t)S(t)\,dB(t)...
Hans's user avatar
  • 2,776
3 votes

Does skew flatten with a decline in volatility?

The description by Bennett is not very clear, but the reference to the Figure 103 in the text at the end of the paragraph that you cite should resolve the issue. Bennett is saying that once the sudden ...
Hans-Peter Schrei's user avatar
3 votes
Accepted

Computing moments of implied distribution

With calculating moments I'll assume you mean calculating $$ E[S_T^n] \enspace\text{for} \enspace n \in \mathbb N $$ Now in general \begin{align*} E[f(S_T)] &= \int_0^\infty f(K) C''(K) dK \\ &...
Frido's user avatar
  • 1,874
3 votes
Accepted

Pricing an American FX Option using Quantlib

The GarmanKohlagenProcess manages both foreign and domestic curves and can be passed to every engine that asks for a ...
Luigi Ballabio's user avatar
3 votes

Relationship between options open interest and spot price movement

This presentation by Robert Almgren cite most of the literature on this topic: Option Hedging with Market Impact. Olivier Guéant and Jiang Pu worked on the same topic (hedging taken market impact into ...
lehalle's user avatar
  • 12k
3 votes

Difference Between Option market price and Theoretical price?

Welcome to the world of options. First and foremost rule of the game, you should imprint it: The market is right, you are wrong. This may seem absurd, but it's not. At least for the first ten years or ...
Frido's user avatar
  • 1,874
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 ...
user35980's user avatar
  • 1,366

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