# Digital option pricing call spread

Consider buying two calls with and selling two calls at:. A mathematician doesn't care. The greeks-delta and gamma in general as the spot approaches the barrier become extremely volatile.

Whether the bank has a model to price and determine the risk of the trade. What the trader achieves by doing so is a smoother set of greeks specially the delta. Managing the risks of a multi asset trade with illiquid stocks as undeliers would be the most difficult. The greeks-delta and gamma in general as the spot approaches the barrier digital option pricing call spread extremely volatile. Managing risks of Digital payoffs - Overhedging 3.

As a starting point, consider buying a call with and selling a call with: As an example let's consider a binary option in digital option pricing call spread figure below booked as a call spread. To extend the discussion to the barrier trades, a barrier trade can be viewed as a combination of an option spread and an option. This post is based on problems 2.

Discontinuities in the payoff. Ofcourse, Not all trades require pre approval esp. For new payoffs the trader will come up wth an overall hedging strategy for the trade. Often the most important aspects of the hedging strategy revolves around managing greeks around discontinuities or barriers.

Generalizing this idea - consider a number. As a starting point, consider buying a call with and selling a call with:. If he's not comfortable with either of the two, he may not approve it. I am just short the profit at the moment. In this article, I shall talk about 'Overhedging' digital option pricing call spread is a technique to handle effectively risks around barriers.

You earn from selling the calls, and pay for the calls. Some of the factors that are considered are: For example an digital option pricing call spread and in call option can be booked and hedged as a combination of a call spread with strikes being barrier and barrier - overdhedge and a call option with strike equal to the barrier level. Some of the factors that are considered are: A digital call option with is similar - it pays off one dollar if at expiration, and pays off zero otherwise:.

You earn from selling the calls, and pay for the calls. Discontinuities in the payoff. I'm never likely to go there. For new payoffs the trader will come up wth an overall hedging strategy for the trade.

For example an up and in call option can be booked and hedged as a combination of a call spread with strikes being barrier and barrier - overdhedge and a call option digital option pricing call spread strike equal to the barrier level. The greeks-delta and gamma in general as the spot approaches the barrier become extremely volatile. Managing risks of Digital payoffs - Overhedging 3. How can you use to price the digital option?