Probability of a stock to follow a specific pathway

[destriero]

There are people on this board would could price it for you, but you're known, so as a buyer of the structure you're fucked bc the mkt would be skewed against you.

There is no utility in pricing it the way you're asking. The complexity would make the market stupid wide.

You buy a $90 touch.

You buy a $110 no touch (sell a touch).

**** Barrier is touched ****

You buy an $80 no touch (sell a touch).

OK, the utility of pricing static vols to the structure is a thing, but again, the thing would be 5x95 mkt.

 

[JamesJ]

Intraday barrier breaks would kill it. These are PD exotics.

Agree, market would be wide on these...
And a nightmare to hedge...

 

[destriero]

Agree, market would be wide on these...
And a nightmare to hedge...

I mean that as a touch the intraday breach would kill the no touch condition. It would pay to the seller.

 

[MrAgi1]

There are people on this board would could price it for you, but you're known, so as a buyer of the structure you're fucked bc the mkt would be skewed against you.

There is no utility in pricing it the way you're asking. The complexity would make the market stupid wide.

You buy a $90 touch.

You buy a $110 no touch (sell a touch).

**** Barrier is touched ****

You buy an $80 no touch (sell a touch).

You’re right. The complexity is to much. @destriero

 

[MrAgi1]

And you can do this Monday on binary.com. You're $100MM away from having an ISDA or $10MM from trading on a PB's ISDA, so what exactly is the point?

@destriero the point is, because of complexity of the pathway, buying it as single option, I could have a return over 10x my risk: now this can be a good hedge for my other trade. If I do it on binary.com my combined odds drop drastically to maybe even a 1:1 risk to reward because I need to buy 4 separate trades and that does not serve my specific hedging purpose. It’s hard to explain but your point is sensible tho.

 

[destriero]

You’re right. The complexity is to much. @destriero

The structure that I outlined is optimal as the 80-NT (2nd condition) would be far cheaper (an input) than if packaged in the original structured prod. as shares have dropped and vol has risen. This assumes that this is a fairly long tenor (not a few days to exp.)

 

[destriero]

@destriero the point is, because of complexity of the pathway, buying it as single option, I could have a return over 10x my risk: now this can be a good hedge for my other trade. If I do it on binary.com my combined odds drop drastically to maybe even a 1:1 risk to reward because I need to buy 4 separate trades. And does not serve my specific hedging purpose. It’s had to explain but your point is sensible tho.

Your 10x figure is fantasy. You're stating that structured as a delimited payoff (0-100) you're buying this for 10? C'mon man.

Equity exotics are a small fraction of what's traded as TRS. As an intellectual exercise it's cool, but it's not practical. The edge loss would make the independent structures look cheap. You've got a better chance of starting forward for the Knicks then getting this traded.

 

[destriero]

Mine has the edge, regardless of vols, as touching 90 would trigger the purchase of the 80-NT which would be cheaper (due to TP/moneyness) ignoring time.

 

[taowave]

Am I correct that this structure trades dirt cheap??

Numerical example:

How can I calculate the probability of the complex event below to occur within a particular duration of time. If the event does not occur it is classed a failure.


The current price of a stock called XYZ is $100 (i.e delta of +-0.5 for an $100 strike call/put)


First Condition:

I need the stock to touch $90. Before touching the $90 any price may be touched that is less than $110. If $110 or higher is touched before the $90 that is a failure.


NOTE: When XYZ at the start was $100; A $90 put strike had a delta of -0.27 and A $110 call strike had a delta of +0.27.



Second Condition:

If the first Condition is satisfied(i.e $90 had just been touched without touching $110 first), then now XYZ can touch any price, even $110 or above but the new restriction is that it can not touch $80.


NOTE: Because price just touched $90 deltas have changed. However at the start when XYZ was at $100 the $80 put strike would have a delta of -0.21.


Delta is approximately twice the probability of touch. I need an approximate answer to what the probability of the stock to follow the complex part is going to be?


Thanks for your contributions.

 

[MrAgi1]

Am I correct that this structure trades dirt cheap??

@taowave
It should be mathematically because the probability of such an event occurring is quite small. And small probability means cheap premiums paid. However, there are other problems such as liquidity which increases cost. I guess you already know about all this.