Volatility and Complex Strategies

Question 1

Implied return volatility

Answer 1

the volatility over the remaining life of an option price under assumption of risk-neutrality.

Question 2

Options Vegas

Answer 2

indicates the sensitivity of an options value to a change in the volatility of the underlying asset.

Question 3

What is vega for deep in-the-money and out-of-the-money options?

Answer 3

Zero

Question 4

Option Gammas

Answer 4

Indicates the curvature in the relationship between the option price and the price of the underlying asset

Question 5

The main reason options sell above their intrinsic value?

Answer 5

Due to Gamma

Question 6

Volatility diffusion risk

Answer 6

accrual of small changes in volatility

Question 7

volatility skew

Answer 7

indicates that options that differ by moneyness have different implied volatilities.

Question 8

volatility structure with a smile or a smirk

Answer 8

is where out-of-the-money put options have higher levels of implied volatility than other options

Question 9

Short strangle

Answer 9

a short call option and short put option on the same asset but with different strike prices.

Question 10

Short straddle

Answer 10

a short call option and short put option on the same asset and with the same strike price

Question 11

iron butterfly

Answer 11

short bull spread and a bear spread such that the two spreads share the same middle strike price.

Question 12

iron condor

Answer 12

short out-of-the-money bull spread and an out-of-the-money bear spread.