Could you share which brokers do you use, and also which underlying instruments? Is what trade European or American style?
Also, thanks for the soccer link. It was really helpful! Enjoyed the games live!
Are Option Sellers "Cheated"?
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Could you share which brokers do you use, and also which underlying instruments? Is what trade European or American style?
Also, thanks for the soccer link. It was really helpful! Enjoyed the games live!
Vanillas can't be replicated with binaries.
On the binary side, the payoff is one as far as the strike is reached, that means if the spot S rises to strike+dS, the payoff will be 1.
On the vanilla side, If the spot rises to strike+dS, the payoff will be ds, that is around 0
Pricing doesn't mean replication. In BSM world, a vanilla call is worth a long AON and a short CON. Skew sensitivity, slippage, transaction costs would change the deal and make replication an impossible task. The same way, none on this earth can replicate a binary with a narrow call spread. It 's a good way to price it, to grasp skew effect into it, but in no way to trade it.
1. Which exercise style (american only or both european and american) you have in mind in above analysis?
2. I agree.
American or european style binaries have the same payoff : that is $1, as far as the spot ends up above the strike, no matter how far.
Assume your vanilla 100 call ends up in the money by $0.10, (final spot is 100.10) . How could a binary replicate this payoff? There is no way.
Assume your vanilla 100 call ends up in the money by $0.10, (final spot is 100.10) . How could a binary replicate this payoff? There is no way.
It is not difficult to find a suitable method 
the problem is that u have to believe what u are carrying
the problem is that u have to believe what u are carryingThe issue is not about the payoff value, but about when the payoff is determined. In European style, it is at expiration. In American style, it can happen before expiration. Do you agree? If yes, then my question was on the effect on your analysis of the exercise style of the binaries.
Asset binary is not capped, and captures the "missing" 0.10 (Stock acquired is worth 100.10). Did you not read the example I gave, and also jcapital's answer to a similar question earlier in this thread?
The style has nothing to do with that, but the maturity.
American style binaries have a maturity that can be shorter, but the payoff remains the same and remains in a discrete form. Hence one can't replicate a vanilla with a strip of CON options.
If you could describe more accurately the options you have in mind, it would be useful to know what mean.
Back to binary options where the payoff is determined at expiry only (so that it is better defined). Why do you think that a vanilla is not the same (at beginning and at end) as one long asset binary call and short S cash binary calls?
Provide a counter example if you think it is wrong.
Back to binary options where the payoff is determined at expiry only (so that it is better defined). Why do you think that a vanilla is not the same (at beginning and at end) as one long asset binary call and short S cash binary calls?
Provide a counter example if you think it is wrong.
Golf - a good walk spoiled.
Football - a perfectly good grassy field, spoiled by 23 idiots running around on it.
Football - a perfectly good grassy field, spoiled by 23 idiots running around on it.