Bull Call Spread is an options trading strategy that involves the purchase of two call options with the same expiration and different strike prices. In the strategy, the trader buys one call option with a lower strike price and sells another call option with a higher strike price. Both calls have the same underlying security. […]
Derivatives
Understanding Options Greeks
In order to have a deep understanding of how option prices are determined, we need to focus on the response of option prices to the factors that determine its price. As we noted above, the price of an European Option is determined by the price of the underlying stock, the exercise or strike price of […]
Binomial Option Pricing Model in R
In the binomial option pricing model, the value of an option at expiration time is represented by the present value of the future payoffs from owning the option. The main principle of the binomial model is that the option price pattern is related to the stock price pattern. In this post, we will learn about […]
Plotting Volatility Smile in R
The main flaw of the Black Scholes model is that it assumes that the volatility of options contracts is constant for different strike prices. This assumption is not reflected in the real world where different strikes prices have different Implied Volatility values showing that investors and traders assign higher premiums for options that allow them […]
Black Scholes Options Pricing Model in R
The Black Scholes model estimates the value of a European call or put option by using the following parameters: S = Stock Price K = Strike Price at Expiration r = Risk-free Interest Rate T = Time to Expiration sig = Volatility of the Underlying asset Using R, we can write a function to compute […]
Review of Options Contracts
Options are financial instruments that give the holders certain rights that they can exercise at the time of expiration. A call option gives its owner the right to purchase an underlying asset at a specified price and at a specific time. A put option gives its owner the right to sell the underlying asset at […]
Exploring Open Interest for Futures Contracts with R
In this article we will explore in greater depth the Open Interest variable of the futures contracts price data and see in which months of the year this variable tends to increase for a particular contract. For this purpose, we have gathered contracts futures data from CSI 500 Shanghai Index. Our task will be to […]
Contango and Backwardation
The concepts of Contango and Backwardation are related with the term structure of the futures contracts. During the life of a contract, the difference between the futures price and the expected future price is called basis. At the end of the contract’s life, the futures price converges to the expected future spot price. Each month, […]
Creating Term Structure of Futures Contracts Using R
The terms structure of the futures contracts for a specific asset is generated by the contracts prices at different expiration times. The contracts have different prices on each expiration date and there is an underlying relationship between them that is reflected with different shapes. The most common shapes are called normal or inverted forms. These […]
Different Parties in the Futures Market
The future market is composed of different types of agents that go to the futures market for a specific purpose. These agents raise the trading volume and open interest during the contract life. Overall the futures market is composed of speculators and hedgers. Speculators The speculators can be classified into market makers, day traders and […]