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12 votes
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Why do institutional Traders prefer Short Selling instead of Buying Puts?

In my opinion, professionals mainly trade options if they want to trade the volatility. I believe there is a mathematical proof that shows that if the realized underlying volatility between the option ...
  • 5,306
9 votes

Why do institutional Traders prefer Short Selling instead of Buying Puts?

In addition to other reasons mentioned here, options tend to be expensive to trade (they have high bid-ask spreads). These do add up in institutional asset management, so best avoided. Further, if ...
  • 191
8 votes
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Positive theta on a long put?

If a european option value becomes lower than intrinsic value it gets negative time value. In this circumstance the theta becomes positive because as time approaches to expiry the option value has to ...
  • 2,137
7 votes

A paradox about the American Put option price

So, from this simple no-arbitrage argument, we see that the price of the option must always be at least its intrisic value. Yes indeed However, at this point I realized something strange: if this ...
  • 14.1k
7 votes
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Can an In-the-Money Put Option's price $>$ its Strike Price?

Under the assumption that the underlying cannot have a negative value, then the value of a put option cannot be greater than the strike. The reason behind this doesn't require maths, it's fairly ...
  • 2,446
5 votes

The role of Gamma in replicating a put

If you could hedge continuously with zero transaction costs, the gamma would be irrelevant: you would perfectly replicate with delta hedging and be done. In practice, hedging is discrete and there ...
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5 votes
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How to short an option?

Given one satisfies margin requirements anyone can short exchange traded options as long as local regulators permit (American retail investors at present are not permitted, for example, to trade ...
  • 14.1k
5 votes
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When does the CBOE Put Protection Index (PPUT) make profit?

The PPUT strategy is an example of a "tail protection strategy". The objective is to have a return somewhat similar to the return of the S&P 500 but with better performance during "crashes" (sharp ...
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5 votes
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How to create a synthetic put?

As you can see from the wiki page, the delta of a put is $$\Delta = -e^{-qT}N(-d_1)= -e^{-qT} \left(1-N(d_1)\right)$$ Recall that this $\Delta$ is the derivative of the value of the put $p$ with ...
  • 10.9k
4 votes

Can increase in volatility reduce the price of a deeply in-the-money European put?

If you hold an option, you're always vega long, i.e. if volatility increases, your position increases as well - regardless of moneyness and the option type (put or call). Note firstly that by the ...
  • 14k
4 votes
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How to Take Advantage of Arbitrage Opportunity of Two Options

I think it is far easier to understand by just drawing the payoffs. You have two put options: A European put option on a non-dividend paying stock with strike price 80 is priced at 8 dollars, and a ...
4 votes

Why do institutional Traders prefer Short Selling instead of Buying Puts?

Puts are not available on all names, or might only be available for a limited set of expiries. I'm sure there are other reasons but those are the two most obvious.
  • 2,121
4 votes

Why do institutional Traders prefer Short Selling instead of Buying Puts?

At the risk of making maybe three obvious points: 1- Many funds' investment theses are not predicated on a particular price point on a specific expiry date. They simply believe that X is too high ...
  • 4,936
3 votes

Can increase in volatility reduce the price of a deeply in-the-money European put?

Maybe it will help your intuition if you think in terms of log-moneyness $\ln S/K$ instead of $S/K$. Let's look at a `deep' in the money put $K=100, S=10$. That sounds really deep in the money, but ...
3 votes

Delta Hedging/ Exchange for Currency Options

I am assuming you are short EUR and long USD based on your description of your hedges. I am also assuming the size of your hedges and your fx position are the same. In the first example of a hedge ...
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3 votes
Accepted

is relating bounds to relation between time to maturity and european put option price correct?

There is no contradiction at all here. $Ke^{-rT}$ goes to zero for $T$ going to $\infty$ so the relation you mention suggests that $-S\leq p \leq 0$ as $T$ gets bigger. If $r>0$. Put prices can (in ...
  • 1,585
3 votes
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Understanding the relationship between the Black-Scholes formula and a replicating portfolio

It is my understanding that a replicating portfolio for a put involves short selling stock and lending money. You cannot statically replicate an option. So this is not true in general, you'll need to ...
  • 14.1k
3 votes

A paradox about the American Put option price

I think the chain of logic should be as follows: We have put value >= intrinsic. Therefore either put value > intrinsic or put value= intrinsic. If put value > intrinsic, then it is not optimal to ...
  • 14.3k
3 votes

Put Volatility Smiles and Implied Volatility

This can be due to various effects. I will list you 2 of them off the top of my head: Jumps/Crashes : assume you were to price a put option which expires in a few days from now. Your diffusion model ...
  • 14.1k
3 votes
Accepted

Payoff of a butterfly c++

A butterfly in general has a payoff of the form \begin{align*} (X_T-K_c)^+ + (K_p-X_T)^+-(X_T-K_{atm})^+-(K_{atm}-X_T)^+, \end{align*} where $X_T$ is the asset value at maturity $T$, while $K_c$, $K_p$...
  • 20.5k
3 votes

How to short an option?

Of course you can sell options and you can certainly sell options on most major indices. Thinkorswim (TDAmeritrade) offers and excellent platform. Moreover, one can short options without "full" ...
3 votes

How to short an option?

It depends on the derivatives exchange but e.g. Eurex exchange can also be used by retail investors as long as they are qualified (concerning their max. risk level) and their bank offers access to it (...
  • 27k
3 votes
Accepted

Most profitable PUT strike price in these times of high volatility?

You need an implied volatility assumption in addition to the price drop assumption to compute that. With a higher implied volatility increase the "profitability peak" you have will gravitate towards ...
  • 2,878
3 votes

Why does black scholes model give lower prices for puts with further time to expiry?

It's the interest rate component. That is more meaningful in the formula. Note that the call becomes more expensive. Think about it this way. You could buy the call and sell the put instead of ...
  • 2,458
3 votes

Why do institutional Traders prefer Short Selling instead of Buying Puts?

Cost. And greed. They want to squeeze every penny that is possible out of their transaction. It costs much less, maybe nothing, to short stocks that do not even exist. However the risk is ...
  • 31
3 votes

Why do institutional Traders prefer Short Selling instead of Buying Puts?

Two main reasons: cost/premium: there is upfront premium associated with purchase of any put option. If your option ends up out of money, your premium is lost. for example, if stock price remains ...
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2 votes
Accepted

What is the strike of a short put that mimics a covered call

This is not quite right. The covered call you are describing is equal to selling a Put with the same strike price (\$105) and holding ( \$105 / (1+r) ) in the bank. If you draw the Payoff diagram ...
  • 1,335
2 votes

American put on a foreign currency

FX options are essentially the same mathematically as options on stocks that pay a continuous dividend. So the same arguments apply. If you are deeply in the money, it may be time to exercise a put.
  • 6,763
2 votes
Accepted

How to hedge a put under the Black-Scholes model?

Assuming zero interest, the put option has the price \begin{align*} KN(-d_2)-S_0N(-d_1), \end{align*} and delta $-N(-d_1)$. When $N(-d_1)$ units of stocks are shorted and invested in bonds, the total ...
  • 20.5k
2 votes
Accepted

Put Volatility Smiles and Implied Volatility

The short answer: Your observation is caused by some sort of central limit theorem. The long answer: The reason for the volatility smile/skew is the non-normality of the assumed return distribution. ...

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