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Junior quant interview question: You work on the equity derivs desk at J.P. GoldmanStanley. A client comes to you and wishes to buy a perpetual GME binary call option, which pays $1,000 if the price ever trades above $1,000. What do you quote them, and how wide is your spread?
My mid is the current share price, spread is the bid/offer spread of the underlying, plus some to cover gap risk (eg if the stock touches 1000 and immediately gaps down to 900) plus the profit I can gouge them for.
That’s assuming I know they want to buy. If it’s a two way quote I need a wider spread to cover the risk of gapping from below 1000 to way above, in fact I probably want to lower the mid too.
this only works because of the infinite maturity right, otherwise you have the risk of your hedge doing whatever and your binary expiring worthless
Yeah if it’s not a perpetual it is... more complicated
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