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5 votes

What is the P&L

Can’t be calculated precisely from the information given, but we can make an approximation: -first, assume that you delta hedged your call so we start with a delta neutral portfolio -second, note that ...
dm63's user avatar
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0 votes

What to predict in delta-gamma hedging?

It does not make sense to buy the "prime" option, you would only obtain a gamma-neutral portfolio by shorting it, because you would need the option gammas to offset each other. I don't think ...
KaiSqDist's user avatar
  • 1,122
0 votes

Expressing Volatility Smile as One Number

I looked into the vol of vol parameter in the SABR model and just wanted to share my thoughts on it as a prospective curvature measure. The SABR model is governed by the following stochastic processes:...
KaiSqDist's user avatar
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1 vote

pricing option with two volatility regimes

The implied vol should be the sqrt of realised variance over the option. This is $sqrt(0.5*(20)^2+0.5*(90)^2)$. This is just a result of the fact that for a European option, only the terminal ...
Arshdeep's user avatar
  • 2,055
0 votes

Leveraged ETF construction

In the paper by Cheng and Madhavan (2010) you will find an explicit example how to construct leveraged ETFs using TRS and what are the issues with it: https://jplinvest.dk/wp-content/uploads/2020/12/...
T123's user avatar
  • 533
1 vote

Adjusting for variance bias when using overlapping data

For anyone looking this up 10 years later, you can reference Euan Sinclair's Volatility Trading pg 40. He says that we need to know how much bias is introduced into our volatility estimates by using ...
quantum_poster's user avatar
0 votes

Constructing payoff diagram using European calls

Hi and welcome to the forum. I am quite confused by your last paragraph, but I will assume you understand the basics of options and long/short call payoffs. An easy way to understand this problem is ...
KaiSqDist's user avatar
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2 votes

Purpose of Vega Hedging

Doing away with jargon for a bit, it is wise to hedge every risk factor present in your portfolio. Implied vol is one of them, just like the spot.
Arshdeep's user avatar
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0 votes

Purpose of Vega Hedging

It depends on the strategy. The position seller suffers a lot from vega. He can try to balance the portfolio but it unbalances the delta gamma hedge. It also depends on the time until maturity. If you ...
Gilberto's user avatar
1 vote

How to conclude which option is overpriced (by using implied volatility)

If 23% vol is going to be really the realised vol, then both are overpriced and delta hedging both will give you a positive PnL. If you calculate delta with realised vol, you gain the difference in ...
Arshdeep's user avatar
  • 2,055
1 vote

How to conclude which option is overpriced (by using implied volatility)

Are these options priced with Black-Scholes or some other model? Most often, models assume a risk-neutral framework to simplify the pricing of these products and do not consider the risk preferences ...
KaiSqDist's user avatar
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0 votes

Why do ATM options intuitively have higher Time Value (Extrinsic Value) than Out- and In-The-Money options?

Another way to look at it: The PnL gain from delta hedging is proportional to gamma and always positive. Gamma is highest at the ATM so you have higher PnL gain from the dynamic hedge - and this ...
Arshdeep's user avatar
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1 vote
Accepted

Why do ATM options intuitively have higher Time Value (Extrinsic Value) than Out- and In-The-Money options?

For an OTM option, time value represents the likelihood that the option ends up in-the-money, increasing its value over its current "intrinsic" value of zero. For an ITM option, time value ...
D Stanley's user avatar
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3 votes

Why are Black-Scholes derived greeks used for risk management when alternatives exist?

I do not agree with the answer by @river_rat. SABR greeks (the so-called Bartlett delta and vega) are used by practitioners in Interest Rates trading from my own experience. In general you want your ...
Hasek's user avatar
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1 vote

Why are Black-Scholes derived greeks used for risk management when alternatives exist?

Pick your poison, what is better? A simple model that is wrong or a complicated model that is also wrong. Add to that computation time on large portfolios and the simplicity of a closed form Black-...
river_rat's user avatar
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1 vote
Accepted

If an option is undervalued, how does shorting a portfolio generate profit?

Question 1: Why do we short one call option? Why do we not long a call or short a put? You could do the other combinations, but then you would have to: Short Put > Short Stock Long Call > Short ...
KaiSqDist's user avatar
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3 votes

Delta Hedging using another correlated asset

This example is from Exotic Options and Hybrids: A Guide to Structuring, Pricing and Trading page 68 equation 5.3. We are trying to find out $\Delta_2$, which is the amount of $S_2$ we need to ...
Bruce Chang's user avatar
2 votes

What are the downsides of using Kim's integral equation (1990) to determine the exercise boundary of an American option?

Note: the most popular approximation in quant libraries I have known is not from Kim (1990) but rather the Whaley approximation. There are several good reasons to prefer numerical PDE solvers over ...
Brian B's user avatar
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1 vote

How to estimate Dealers’ Gamma Positioning

The Hedging Demand and Market Intraday Momentum paper by Baltussen et al may be useful to answer your questions. Not only retail buys puts and sells calls, mutual funds tend to also write calls and ...
aghilario's user avatar

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