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He could go out and just purchase the individual options. Or he could (if he
is an institution) go to the derivatives desk of a major bank and ask for an
exotic option (in this case a 2 factor option) which would be priced to take
into account the correlation between the 2 indicies - this would lower the
value of the net premium as there is obviously a correlation between the 2
indicies that is usually greater than -1.
The option would have a payoff of something like:
Max (NDX - SPX +K,0 ); where k is the strike.
There are a number of ways to solve this both numerically and with closed form
approximations.
There are some excel add-ins that can be purchased to price this kind of option
but the model you use must reflect your assumption of the distribution of the 2
underlyings or the spread, depending on how your price.
Coming up with a correlation figure is always good for a laugh as its dynamic
and cannot be hedged out...
A good primer on exotic options would be Hull & White's book : Options, Futures
& Other Derivative Securities. There are more advanced books (Black Holes to
Black Scholes is on of the older but better ones) on the subject and a good
periodical would be Risk Magazine.
Hope this helps.
E.
JCrystal wrote:
> I have a customer that is trying to test a system out to straddle two
> different indexes or two different futures. He calls it a intra-markert
> straddle. He buys a call on NDX and put on SPX or vise versa. (the goal is
> to narrow the spread and to get as close to the money as possible). He is
> looking for a software package to give him the value of the straddle. Is it
> possible to due this with Option Station. Omegas tech was unaware if it was
> possible to look at a position involving two instruments. Straddles are not
> the only thing he is looking at doing. Thanks Jeff
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