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Option Strategies

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8/5/14
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303
What I'm investigating:
I wrote a C++ application that generates a payoff diagrams at maturity with any combination of financial derivatives. I have been researching various well known option strategies (such as straddle, bear-spread, strangle etc.)

The problem:
All of these strategies only work under certain predictions about the market. None of them work for all market movement.

Question:

Under suitable assumptions, is it possible to design a portfolio that theoretically makes money under any market movement?
 
You are describing arbitrage.

In a perfect market, arbitrage is impossible; there is no strategy that will guarantee you a profit. In the real world, there are occasional opportunities for arbitrage, but you have to look for them.
 
Last edited:
You are describing arbitrage.

In a perfect market, arbitrage is impossible; there is no strategy that will guarantee you a profit. In the real world, there are occasional opportunities for arbitrage, but you have to look for them.

I am able to make 'unjustly' assumptions for the purpose of this project. So far, my application exploits the put-call parity. It just searches through some call and put options, and if it finds the exploitation. If its found, it will long the call, short the put and short the stock. The payoff diagram is always positive here.

I understand that there is no free lunch under no arbitrage assumption, but what if I'm able to make crazy assumptions? I have very little finance knowledge. Are there any papers you would recommend for my project?
 
I am able to make 'unjustly' assumptions for the purpose of this project. So far, my application exploits the put-call parity. It just searches through some call and put options, and if it finds the exploitation. If its found, it will long the call, short the put and short the stock. The payoff diagram is always positive here.

I understand that there is no free lunch under no arbitrage assumption, but what if I'm able to make crazy assumptions? I have very little finance knowledge. Are there any papers you would recommend for my project?

Well, even if you make crazy assumptions - you get market data from the real world, right? The fact that the put-call parity seems to hold is a sign that markets are indeed quite efficient :)
 
Well, depends on the data. Most exchange traded options are American (I think all of CBOE). Call - Put parity doesn't hold under American options...
 
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