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What is the best function to build a Delta neutral Butterfly SPP?

Lorenzo B
Posted 5 years ago

Hello.

I would like to insert a delta neutral structured products in a model. The SP is a long butterfly spread and It can be constructed by purchasing one in-the-money call option at a lower strike price, while also selling two at-the-money call options and buying one out-of-the-money call option. I would like to find the strike price of the in-the-money call option to make the Delta of the SP = 0. I'm doing it using the function "findroot" because I used it in the past for a straddle and it worked but in this case not. Is there a better function to do it? Or am I using it in an incorrect way? The file with the code is attached.

Any help will be very precious for me.

Lorenzo

Attachments:
Butterfly code.nb
POSTED BY: Lorenzo B
5 Replies
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Rohit Namjoshi
Rohit Namjoshi
Posted 5 years ago

Thanks!
POSTED BY: Rohit Namjoshi
Lorenzo B
Lorenzo B
Posted 5 years ago 
K[sigma_, k_, zeta_, Ka_, K_, Ko_, V_, S_] := 
 x /. FindRoot[gs[sigma, k, zeta, Ka, x, Ko, V, S] == 0, {x, 100}][[1]]

Plot[{psi[sigmab, kb, zetab, Kab, 
   K[sigmab, kb, zetab, Kab, x, Kob, sqrtVb^2, Sb], Kob, sqrtVb^2, Sb,
    x, Tb], 
  phi[sigmab, kb, zetab, Kab, 
   K[sigmab, kb, zetab, Kab, x, Kob, sqrtVb^2, Sb], Kob, sqrtVb^2, Sb,
    x, Tb], 
  1 - (psi[sigmab, kb, zetab, Kab, 
      K[sigmab, kb, zetab, Kab, x, Kob, sqrtVb^2, Sb], Kob, sqrtVb^2, 
      Sb, x, Tb] + 
     phi[sigmab, kb, zetab, Kab, 
      K[sigmab, kb, zetab, Kab, x, Kob, sqrtVb^2, Sb], Kob, sqrtVb^2, 
      Sb, x, Tb])}, {x, 0, 10}]

This is an example. gs is the function to compute the delta of the structured product. Findroot finds the value of the strike price of a call option included in the structured product for which the structured product is delta neutral (gs=0).
POSTED BY: Lorenzo B
Lorenzo B
Lorenzo B
Posted 5 years ago

Hello Rohit, I'm sorry, I didn't see your question before. I used the findroot function. I will post an example, probably tomorrow.
POSTED BY: Lorenzo B
Rohit Namjoshi
Rohit Namjoshi
Posted 5 years ago

Hi Lorenzo,

Would you mind posting the solution?
POSTED BY: Rohit Namjoshi
Lorenzo B
Lorenzo B
Posted 5 years ago

Solved
POSTED BY: Lorenzo B
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