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BLOBY
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Joined: May 17th, 2004, 5:07 am

Structured Put Option with a Volatility Target and a strike depending on the realised volatility

March 23rd, 2009, 4:24 pm

Did anybody hear about a protective put with the following characteristics ? Put Option with a Volatility Target and a fixed maturity, but changes the option strike depending on the realised volatility. The option has an embedded contingent mechanism. You choose a volatility target and the strike will adjust as a function of the realized vol and your target vol.Have you got an idea about how this put is structured ??
 
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EndOfTheWorld
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Joined: September 30th, 2008, 8:35 am

Structured Put Option with a Volatility Target and a strike depending on the realised volatility

March 24th, 2009, 6:11 am

I've seen something a bit similar: the timer options. The instrument is like a vanilla option, except that at inception the expiry date is unknown. Instead, one choses a volatility target and a horizon, which will be used to determine when the option will expire. This allows to trade options with supposedly to high vols.In your instrument, do you have any idea the strike would be determined wrt the realised vol?
 
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BLOBY
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Structured Put Option with a Volatility Target and a strike depending on the realised volatility

March 24th, 2009, 7:45 am

Yes, I have seen this kind of option (call option in this case).Anyway, it's a smart way to buy cheap options...
 
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EndOfTheWorld
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Joined: September 30th, 2008, 8:35 am

Structured Put Option with a Volatility Target and a strike depending on the realised volatility

March 24th, 2009, 8:03 am

Regarding your product, would that be some sort of skew trade, where at inception you determine the skew (how vol will realised wrt the spot). At matruity, the realised vol and your skew factor will determine the strike?
 
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BLOBY
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Joined: May 17th, 2004, 5:07 am

Structured Put Option with a Volatility Target and a strike depending on the realised volatility

March 24th, 2009, 8:48 am

Right, but this option is cheaper than vanilla option, so you have to sell other options in order to cheapen the cost of your structure ...