# Tag Info

### 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 ...
• 9,244

### What is a Constant Maturity Swap (CMS) rate?

In a vanilla swap, the IR on the floating leg usually depends on the reset period/swap frequency. If frequency is 6m, 6m LIBOR is used for reset, 3m LIBOR for quarterly resets etc. In a floating CMS ...
• 61

### Using a call-spread to hedge a digital option

There are a few extra things to consider here where you'll get a different answer if you ask a quant or a trader. If we have a european digital that pays \$1 if the underlying is above 120 ($S_0 = ...
• 2,591
Accepted

### Construction of Butterfly Spread as sum of Call Options

If you're reconstructing a payoff as a linear sum of call options, then the procedure is quite simple -> since the payoff of a call is zero up to the strike, and then linear, you start on the left (i....
• 2,591

### Vertical Spreads : Long/Bull Call vs. and Short/Bull Put?

Here's a simple retail answer that doesn't involve an option pricing model or a bunch or theory. With vertical spreads: If it's a credit spread, the maximum gain is the credit received and the ...
• 610

### 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 ...
• 1,779
Accepted

• 8,159

### How skew in vertical put spreads change the payoff?

Well, the probabilities implied by the market are not equal. If you believe they should be equal, then go ahead and express yourself in the market. The point is , it is not an objective fact that ...
• 17.4k
Accepted

### Change of numéraire for two risky assets without bank account (Margrabe’s formula?)

Under the risk-neutral measure both stocks follow the GBMs \begin{align} S^{(i)}_t=S^{(i)}_0\exp\left((r-q_i)t+\sigma_iW^{(i)}_t-\frac{\sigma_i^2t}{2}\right)\,,\quad i=1,2\,, \end{align} where the ...
• 2,040

### Pricing European Call Closed Form Spread Options in Python

Firstly, you can really use Margrabe's formula (as @Rylan said). It's exact solution, so there is good first test. You can use numerical integration (scipy methods for example) for test your Monte-...
• 46
1 vote

### Calendar spreads under black scholes world

In commodities, it's not necessarily arbitrage. In the example of oil, if oil has a very low price for delivery in March and a very high price for delivery in April, you may in fact be able to lock in ...
• 635
1 vote
Accepted

The most risk free way to hedge FX risk is using a forward. So if you will receive 1 USD in the 1 Year, and you wanted to protect the EUR value of this receivable, you would sell USD/Buy EUR 1 year ...
• 6,652
1 vote

### Why is Implied Volatility more important than skew for put spread pricing?

All that is saying is that the level of the implied volatility curve is more important than the slope (which is more important than the curvature) when it comes to pricing these spreads. For argument'...
• 862
1 vote

### Why does bull call spread shows higher payoff than bull put spread?

How do you define higher payoff? Could you show what you compute? Do you look at what the options cost at the moment? If you want the same payoff (graphically and expiry), you can do the two things: ...
• 9,244
1 vote

### Delta and Gamma profile

A calendar spread is nothing more than a short call and long call with TTM_1 and TTM_2. If you can find the quotes of those underlying options; you can retrieve the IV and hence the greeks.
1 vote

### Vertical Spreads : Short/Bear Call vs. and Long/Bear Put?

The payoff diagrams look similar. Where they differ is in where the strikes are relative to the underlying. In the call credit spread, both the short call strike A, and the long call strike B are ...
• 6,652
1 vote
Accepted

### Butterfly spread calls and puts

Let's say K=1. If c=0.5, you get a shape like this (as you alluded to): And for c=-0.5, you get this shape: So does look like butterfly.
1 vote
Accepted

### Bjerksund and Stensland model, reasonable minimum value for Volatility?

After some testing, it is clear that a value of 0.005 is the most reasonable minimum volatility to use with this model. It is small enough to be a reasonable starting point (extremely unlikely that ...
• 133
1 vote

### How to price a strategy involving more than 2 different prices?

For such problems, you may consider the moment matching approach. For example, you can approximate the combination of terms where the coefficients have the same sign by a log-normal random variable, ...
• 21.2k
1 vote

### Valuating Prepayment on Loans- Which models are favorable?

BlackRock has the best commercially available prepayment model and Yield Book is basically the industry standard for trading and is decent.
1 vote

### Calendar spread: What are the worst cases?

Theoretically: Veta (dVega/dTime), is almost always negative, therefore, all else equal your calendar spread will not be vega neutral, the longer dated option will have higher vega. Charm (dDelta/...
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