Option replication and exotics journal

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Quote from ssternlight:

RiskArb,

Any pointers on how you size your hedge(s). It looks like you hedge for roughly 50% of the potential loss from hedge initiation -- no idea what the delta of these things is or how it moves...
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Gut-feel. I solve for the risk to the barrier, as you know. That would've required 60 lots, as you've infered by your 50% comment.

The delta is somewhat immaterial due to the gamma as we near the barrier. Solving for discrete hedges into the risk isn't worth the aggravation due to the gamma slope being parabolic. It's algebraic to solve for neutrality, or nearly so. Since I am mildly bullish it's more important that I solve for my hedge risk away from the barrier. I'm only willing to risk $25k on this bullish-stance.
 
Quote from WAWTU31:

RiskArb,

Please explain to an idiot such as myself what it is you are hoping the market will do, up, down or nuetral, to make this option profitable:

Short weak synthetic straddle, bull delta

I always print your journal on Friday's to read over the weekend and would also like to know what book I can purchase to learn more about what it is you trade.

Much appreciated and good luck. I always look forward to your entries.
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The straddle is weak in the sense that there is > risk at the barrier than away from it. Normally, a straddle is neutral at the strike[think vanilla options] at the peak of the implied distro. The neutral req would have me in 60 futures, not 30, so the hedge is weak.

I am expecting slight upside on SPX to 1190-95, but the position earns similarly to a vanilla straddle with a week to expiration. I am looking for a trade near-to, but not impacting the strike. Obviously, that's a bearish (convergence) position, but the initial vol-smile and delta/gamma position favors a rise.

There aren't a great many books on exotics worth mentioning, and I've not read any of them. Any of the in-print texts available at Wilmott's book site are worth looking into.
 
Quote from riskarb:

DAX no touch -- 4750.00 cash
Premium: $55,200
Payout: $120,000 [includes prem paid]
Expires: Nov 3, 2005

Short 10 Dec FDAX from 4845 avg.

Short weak synthetic straddle, bull delta.
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Typo edit: Paid $57,200 for the DAX no touch. Same payout.
 
Quote from riskarb:

The straddle is weak in the sense that there is > risk at the barrier than away from it. Normally, a straddle is neutral at the strike[think vanilla options] at the peak of the implied distro. The neutral req would have me in 60 futures, not 30, so the hedge is weak.

I am expecting slight upside on SPX to 1190-95, but the position earns similarly to a vanilla straddle with a week to expiration. I am looking for a trade near-to, but not impacting the strike. Obviously, that's a bearish (convergence) position, but the initial vol-smile and delta/gamma position favors a rise.

There aren't a great many books on exotics worth mentioning, and I've not read any of them. Any of the in-print texts available at Wilmott's book site are worth looking into.
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Thank you RiskArb

I am a member of Wilmotts, not a member more of a lurking admirer of you quants! lol

how many actual trades make up this strategy?
 
"I run the parms through multiple pricing models and through more than one dealer."

Hello riskarb,

thanks for the quick answer.

But, what´s the meaning of "parms" in your reply?
 
Nikkei double barrier no touch -- 12,950//13,950
Premium: 15,400,000Y
Payout: 25,000,000Y [includes prem paid]
Expires: Nov 7, 2005


Smile has flattened into the US advance. I'll hedge this one aggressively if need be.
 
Quote from riskarb:

Nikkei double barrier no touch -- 12,950//13,950
Premium: 15,400,000Y
Payout: 25,000,000Y [includes prem paid]
Expires: Nov 7, 2005


Smile has flattened into the US advance. I'll hedge this one aggressively if need be.
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Technically 15000 is resistance for nikkei.. I would favor being bearish on S&P and bullish on Nikkei.

I would be somewhat neutral on Dax because its somewhat heavyweighted in oil stocks and oil appears to have setteled in a trading range.
 
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