delta depreciation

[shortie]

Quote from tradingjournals:

BS Model is just a model. It may or it may not represent reality. Let us then assume that we do not have a model at all, but we have a market that gives us other variables, except price of options which we are somehow not entitled to see.

Could one figure out the prices of options, and if yes could one provide variables and formulas to price the options? We want the prices to be the same as the prices in the market, (we do not see the prices, but we know they are there).

To make things simpler, we assume that carry-related costs are zero.

The clock starts now...I hear the ticks already!

are you suggesting you have a model at least as good as B-S but different?

is there anything published as good as B-S out there?

i am not an option guy. i am just curious.

 

[tradingjournals]

Quote from atticus:

the impact to delta from vol is lower than rho under most circumstances.

Do people buy merchandise they may not realize they are buying? Is it lucrative to be involved?

 

[tradingjournals]

Quote from shortie:

are you suggesting you have a model at least as good as B-S but different?

is there anything published as good as B-S out there?

i am not an option guy. i am just curious.

Good post! In a hurry now, so would answer another time.

 

[atticus]

Quote from tradingjournals:

Do people buy merchandise they may not realize they are buying? Is it lucrative to be involved?

All the time. Most wealthy option traders cannot distinguish from a 3rd or 4th moment risk. Suppose you're short gamma and neutral delta to 270 on AAPL for August expiration. Vanna is less than half of rho under 2 sigmas on vol and price on flies, calendars and diagonals.

Understanding that vanna is cheap is certainly worthwhile information. I get your point, and it's on topic. Honestly, there is little point in arguing as "delta depreciation" is the title of the thread.

 

[MasterAtWork]

Quote from tradingjournals:

We did not see your sailing skills in a bathroom, could you then show us your sailing skills in the "ocean situation" described in the post above (a copy is included below)?

First of all, would you please answer my own, on page 11

"What is the point ?
I may miss something so please forgive me if I'm wrong but :

Would you please tell me what is the value of a 0.5311 delta 3 years call strike 47 with a spot at 47 5% volatility using BSM with IR set at 0.1% and the same call value using what you call your trick ?"

Finite variance assumption makes in a zero rate and carry world delta of an ATM call be the same as a twice vol ATM call with 1/4 maturity.
In this world, a 20% vol ATM 1 year call has the same value as a 40% vol 3 months ATM call. Hence, vol is synthetic time, and time is synthetic vol.
In this world, ATM call delta can vary between 0.50...something and 1, as far as vol varies from 0.1% to 15000% .
Great, once again I may miss something, but there is no news here and more, no mystery.

 

[tradingjournals]

Quote from MasterAtWork:

Let's go !


Now if we take Donnap's example,

- a 3 years call 47 with 5% volatility spot 47 with a delta around 0.5173 that is a $1.62 premium (with interest rate set to 0).
Now if you put your interest rate from 0% to 0.1%, your real delta is now around 0.5311 and a $ 1.69 premium.

But if you now derive your call value from that real delta, you would find an approximated value around 2.91, something different from the previous result.

That is : an interest rate rise of just 0.1% will make a final difference of 2.91-1.62=$1.29 (+79.6%). What an approximated value !

In others words, if Donnap gave you a 0.5311 delta for a stock at 47, you would have found a $2.91 call value instead of a $1.69 one.

Since you are still analyzing the question, I had the comment below which I did not post in previous responses:

"So, It did not occur to you that in case of interest you could also use as strike the forward price?"

 

[MasterAtWork]

Quote from tradingjournals:

Since you are still analyzing the question, I had the comment below which I did not post in previous responses:

"So, It did not occur to you that in case of interest you could also use as strike the forward price?"

Course 'it occurs to me'. I derived it for you on page 7 ! If I did, there is no quantitative mystery. So no news here and no guru.
So you got what you called "your trick" that gives you a call value stroke at the forward price given a delta and a stock price. Nothing wrong with that. I think it's useless and makes things much more complex than simple.

 

[tradingjournals]

Quote from MasterAtWork:

Course 'it occurs to me'..

Since you say it did (but there is no evidence it did,but there is demonstrated potential it did not), then what was your point with the interest-related example?

 

[MasterAtWork]

Quote from tradingjournals:

Since you say it did (but there is no evidence it did,but there is demonstrated potential it did not), then what was your point with the interest-related example?

My man,

I understand that you're angry I posted the derivation what you called a mystery. Sorry Mister Guru.

Again, with Donnap's example an IR set to 1%, you got a strike at 48.43136. Do you see that strike on the market ?


Does it occur to you that you can't always find a strike that equalize forward price ? Hence my point "with the interest-related example" is that you got a fast trick, but NOW with additional computation needed to find a forward strike, to find a value for a strike that doesn't exist. Once again, Great ! Don't you finally find it much more complex and a waste of time thus for a trick useless ? Be serious ! Try a real pricer, you would get a real answer.



So right now, what you need to find an option value are, spot/strike, delta and rates. Go ahead, in twenty minutes you will find that with maturity volatility strike interest rate and spot you got a trick to find an option value (Yes I know, people call it BSM, you can call it your trick).

 

[tradingjournals]

1. Now that you mention strikes and not interest rates, why you did not raise your issue as strikes issue, but yet raised an interest rate issue?


2. Furthermore, if it occurred to you, why you did not present it in your derivation ?