Binary options...better than 50/50 chance ?

[cdcaveman]

where K > b is an arbitrary strike. The portfolio H
II
(K) is a combination
of initially buying a digital option paying 1 if ST > b, buying α = 1/(K−b)
calls with strike K and selling α puts with strike b. Upon reaching b we

something like treat the closer side like a single binary, and replicate with vanilla synthetics depending on the + or - delta.. meaning if your closer to the lower barrier touch you have negative deltas and would go long the synthetic and buy the single barrier with the same strike as the touch barrier.. am i right?

 

[atticus]

Quote from cdcaveman:

where K > b is an arbitrary strike. The portfolio H
II
(K) is a combination
of initially buying a digital option paying 1 if ST > b, buying α = 1/(K−b)
calls with strike K and selling α puts with strike b. Upon reaching b we

something like treat the closer side like a single binary, and replicate with vanilla synthetics depending on the + or - delta.. meaning if your closer to the lower barrier touch you have negative deltas and would go long the synthetic and buy the single barrier with the same strike as the touch barrier.. am i right?

You're referring to hedging. There isn't a static replication of a DNT with vanillas. lol, what conclusion arose (where you copied the above)?

 

[atticus]

Quote from cdcaveman:

double no touch... thats some food for thought... sat here and thought about it for a while... i came up with this paper.. i read through the introduction...
http://eprints.maths.ox.ac.uk/784/1/nihao_dissertation_project.pdf

Ahh, I see what you were referring to. What does a dynamic hedge have to do with it? Sure, I hedge DNTs all the time. Not the same subject matter.

The difference between a call spread and a put spread is the box. Euro digital can be replicated with a vertical. There isn't a static vanilla replication for the DNT.

You can price a single barrier (touch) from a digital, but that's not replication.

 

[tickmagnet]

You might as well bet on football .

 

[cdcaveman]

Quote from atticus:

Let me know when you can replicate a DNT with vanillas.

you said this.. so i looked it up.. your subject was the interest related to the lack of fungibility of these .. meaning its a bet between you and one dealer.. why is their interest there.. one dealer can make many mistakes, as opposed to structures on exchanges where mistakes aren't as exploitable. ?

 

[cdcaveman]

Quote from atticus:

Ahh, I see what you were referring to. What does a dynamic hedge have to do with it? Sure, I hedge DNTs all the time. Not the same subject matter.

The difference between a call spread and a put spread is the box. Euro digital can be replicated with a vertical. There isn't a static vanilla replication for the DNT.

You can price a single barrier (touch) from a digital, but that's not replication.

sorry i get what your saying... you said something and i went off looking for ways to hedge double touches..

 

[atticus]

Quote from cdcaveman:

sorry i get what your saying... you said something and i went off looking for ways to hedge double touches..

Obviously you can hedge anything. The dynamic stuff in DNTs is done with a gamma figure. Anyway, I was only referring to synthetics & static rep. I've been trading touches since 2002 and the best advice I can give would be to trade single touches with an initial spot hedge instead of jumping into DNTs.

My most common trade (in shorting distribution/var) was to sell a touch at say 1SD otm and solve for the spot hedge that resulted in a loss of half the debit on a touch (NT debit of 2(n); n=hedge gain at barrier).

 

[cdcaveman]

Quote from atticus:

Obviously you can hedge anything. The dynamic stuff in DNTs is done with a gamma figure. Anyway, I was only referring to synthetics & static rep. I've been trading touches since 2002 and the best advice I can give would be to trade single touches with an initial spot hedge instead of jumping into DNTs.

My most common trade (in shorting distribution/var) was to sell a touch at say 1SD otm and solve for the spot hedge that resulted in a loss of half the debit on a touch (NT debit of 2(n); n=hedge gain at barrier).

That makes sense.... in essense your slow playing the premium... you have a stop loss figure based on the " half debit..".

If your shorting distro.. isn't that a credit ?

 

[FHS]

gamma curvature on these seems to be fairly predictable. selling daily strangles seems to have some promise assuming the ability to exit correctly.

 

[drownpruf]

gamma curvature on these seems to be fairly predictable. selling daily strangles seems to have some promise assuming the ability to exit correctly.

What?