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Did I write the opposite ?

There is no such a thing that an american digital replicated (hedged) with a spread. Narrow spreads mean huge slippage and costs effect relatively to the spreads. They are other ways to do that. Masteratwork

Try this : Vol=30%, r=5%, spot=100, strike=100 dividend=0, maturity=365 days American call = 14.231 American put= 9.861 European call=14.231 European put=9.354 Hence one can't have at the same time American call-american put=european call-european put= call/ put parity

Price it.

I didn't mention Alan, who is a perfect unknown individual for everybody here. What is important is not what Alan quotes, it is what Merton wrote. But you seem to be a well regular visitor of "wank'sites". You got problem with your hands ?

You need to understand something. A parity is composed by a call, you're right, and....a put. So yes there is no interest to exercise an american call, but an american put. If the put is exercised, then there is no more parity. An another way to see that, is to consider c european call...

Wrong. "It can be proved under essentially the same weak assumptions that the above put-call parity relation does not hold for American-style options. Here is a rough outline of the proof. Consider the case of a non-dividend paying stock and a strictly positive interest rate. Then, a...

You've made a mistake. This rule about AAD that is about 0,8 sigma will hold just for a normal distribution. If stock prices or returns are not, one can't use this rule.

This way a delta aroud 96% (deep in the money option), then it's 100%-96%=4% So 2*4%=8% chance of touch I agree it's very approximately :D

Hi MGJ, Don't forget that Black and Scholes model is priced under risk neutral probability. That means you expect the asset drift be the risk free rate.

Hi Kevin What if the delta is about 52% ? :)

The opposite is true too, especially with derivatives.

I'm sorry but I can't believe it. :( I do trade long term options on several indexes, including on SPX. And for what I witness there is no such a thing as a finite and stable correlation between volatility and SPX. Please show me the way Dmo, and I swear to God, I never come back here on ET...

Dmo, Another way to look at negative interest rate is that you can't really lend and borrow money at the same rate as assume in the black and scholes world, in the binomial world, in the trinomial world...and generally written in books. The second point is that sometimes you have to pay...

Hi Dmo, The reasoning is very simple to handle, but rarely shown and explained. So it's for you because the new year :D If negative interest rates are hard to imagine (but last months showed they exist, like negative swap spread to Treasuries), one would prefer a global explanation with...

Hi, Happy new year. Nitro, you're right but Dmo just can' t stop. As a former market maker, it's really weird that he never took a look at volatilities for long term options and their behaviours. If you read some of his posts, he kept focusing on VIX variations and take it as a given...

Hi Mark Happy new year. You wrote: " stocks do not have delta " Are you sure about that ?

Hi guys, European calls on non dividend stock futures are generally set like this: For a call C=exp(-rT)*(F*N(d1)-K*N(d2)) Where r is the interest rate, T the maturity, F the future price, N(x) the cumulative normal distribution...

So, a spread is a limited profit strategy? Dawn, I'm always the last who got the news here... I was kidding Mark ( there is a smiley, isn't).

Hi Crgarcia, Try this: Buy a call spread out of the money, sell a put spread out of the money, theta neutral/cost around zero. The risk is limited (put spread), no time decay (theta neutral), and unlimited profits potential since it is an almost self financing position. :D