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Short Positions, Rally Fears and Option Markets

Author

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  • Ernst Eberlein
  • Dilip Madan

Abstract

Index option pricing on world market indices are investigated using Levy processes with no positive jumps. Economically this is motivated by the possible absence of longer horizon short positions while mathematically we are able to evaluate for such processes the probability of a rally before a crash. Three models are used to effectively calibrate index options at an annual maturity, and it is observed that positive jumps may be needed for FTSE, N225 and HSI. Rally before a crash probabilities are shown to have fallen by 10 points after July 2007. Typical implied volatility curves for such models are also described and illustrated. They have smirks and never smile.

Suggested Citation

  • Ernst Eberlein & Dilip Madan, 2010. "Short Positions, Rally Fears and Option Markets," Applied Mathematical Finance, Taylor & Francis Journals, vol. 17(1), pages 83-98.
    • Handle: RePEc:taf:apmtfi:v:17:y:2010:i:1:p:83-98
    DOI: 10.1080/13504860903075688
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    Cited by:

    1. Jean-Philippe Aguilar, 2021. "The value of power-related options under spectrally negative Lévy processes," Review of Derivatives Research, Springer, vol. 24(2), pages 173-196, July.
    2. Jean-Philippe Aguilar, 2019. "The value of power-related options under spectrally negative L\'evy processes," Papers 1910.07971, arXiv.org, revised Jan 2021.

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