All doubles. When calculating vol I use days/365.0 as time. There should be no rounding problems, I showed some code in previous pages.
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How to simulate selling straddles?
- Thread starter luckyputanski
- Start date
B-S is valuing everything correctly. Your interpretation of it is what's flawed.Quote from luckyputanski:
I thought that Black-Scholes will value options correctly even if prices are fake.
Check out this thread: http://www.wilmott.co.uk/messageview.cfm?catid=4&threadid=89255
Thanks.Quote from Martinghoul:
B-S is valuing everything correctly. Your interpretation of it is what's flawed.
Check out this thread: http://www.wilmott.co.uk/messageview.cfm?catid=4&threadid=89255
If BS is valuing options correctly, how come buying ATM straddles makes money on average?
Yes.Quote from Martinghoul:
Did you read the bit at the end posted by BramJ, firstly?
I think I understand difference between straddle payoff and vol. In simple terms: if price is trending, payoff will be +, if mean reverting it will be negative. To judge vol I would have to continuously delta hedge, then I can make money with short straddles betting real vol will be lower than implied.
What I'm surprised about is that my price changes are normally distributed and I'm not sure why I'm getting so much bias to buying side. I was pretty sure, that with prices being random and changes normally distributed + impl vol at right value, I won't be able to make any money on neither long nor short atm straddles.
Right, let's go through it...
Simplistic exercise for a single straddle. Let's say your underlying is normally distributed arnd 0 with stdev of sigma. You're buying/selling a 1y straddle w/ strike 0. Is that a reasonable setup?
Simplistic exercise for a single straddle. Let's say your underlying is normally distributed arnd 0 with stdev of sigma. You're buying/selling a 1y straddle w/ strike 0. Is that a reasonable setup?
I'm buying straddle 7 days, underlying at 100, strike 100. Price changes are normally distributed, stdev of 2%.Quote from Martinghoul:
Right, let's go through it...
Simplistic exercise for a single straddle. Let's say your underlying is normally distributed arnd 0 with stdev of sigma. You're buying/selling a 1y straddle w/ strike 0. Is that a reasonable setup?
Looking foward to Martinghoul's next post. In the meantime I ran a quick Excel sim usng constant realised vol and constant implied vol and it is in agreement with the formula from Willmott's book. I used
S(7) = S(0)*EXP(-0.5*sigma*sigma*7/365 + sigma*sqrt(7/365)*NORMSINV(RAND()) for spot. (mu = 0)
The variance of the P/L is very significant. I think OP said that he ran 1year i.e. 52 sims(?) which is probably not high enough. Definitely a high variance trading method - even if you can predict vol. Also the distribution of the P/L is very skewed (from my sims) with occasional very nasty losses for the straddle seller (not a surprise)
S(7) = S(0)*EXP(-0.5*sigma*sigma*7/365 + sigma*sqrt(7/365)*NORMSINV(RAND()) for spot. (mu = 0)
The variance of the P/L is very significant. I think OP said that he ran 1year i.e. 52 sims(?) which is probably not high enough. Definitely a high variance trading method - even if you can predict vol. Also the distribution of the P/L is very skewed (from my sims) with occasional very nasty losses for the straddle seller (not a surprise)