options

I have observed that sometimes (mostly for OTM options) near expiration, an increase in option price cannot be fully explained by delta and theta(given volatility is constant). The gamma spiked the premiums especially during intraday moves. Causing a mini arbitrage between the options Greeks as theta would have to embody all the gamma exposure once the index moves halt, is there a way to go gamma…

I'm looking to simulate the stochastic price and volatility process (Heston model) using some form of Euler method for Monte Carlo approximation of option prices. The results that I get are acceptable for deep in the money options and at the money options but not very satisfying at all for deep out of the money options. I want to reduce the variance for faster convergence and the importance sampl…

A covered call is used by an investor to make some small gain while holding the stock. Mostly the reason why a trader would want to create a covered call is because the trader is bullish on the underlying stock and wants to hold for long-term, but the stock doesn't pay any dividend. The stock is expected to go up over a period of next 6 months, and in the meantime, you would want to use this stoc…

What is a Covered Call? A covered call (or covered write or buy-write) is a long position in a security and a short position in a call option on that security.  The diagram below constructs the covered call payoff diagram, including the option premium, at expiration when the call option is written at a $100 strike with a … Continue reading "Covered Writes, Covered Wrongs" The post Covered Writes,…

I presented in an earlier post that I was mostly disillusioned with interview questions, it’s better to find out if you can learn something out of a candidate.Well there is maybe one very simple question that could be revealing, for people who pretend to be vaguely familiar with Black-Scholes:What is the price of an at-the-money binary option under very high volatility? Alternatively it can…

I realized that I have omitted the most obvious virtue of trading options instead of stocks in my last post: the much more attractive reward-risk ratio for options. Suppose your stock strategy generated a buy signal. You can either buy the stock now, or you can buy an ATM call. If you buy the stock, you are of course benefiting from 100% of the upside potential of the stock price movement, but yo…

A Safer Way to Bank on the Banks IF DURING THE PAST YEAR any investor with bearish views on the financial sector needed assurance, all they had to do was look at options trading on the Financial Select Sector SPDR (XLF). During the past 12 months, investors traded more than five million XLF contracts at a rate of 5.7 puts for every call, a level of pessimism not often encountered. Yet the mood to…

SPECULATORS HAVE AN AIR OF ROMANTICISM about them. The good ones are intellectual adventurers seeking profits when the crowd is indecisive, afraid, or too confident. Corporate earnings reports always attract speculators, many of whom use options contracts because they can risk a little bit of money and make a high return should the news prove right the speculation. Now, as many stock prices are s…