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Post Script 3: Dealer Z may not have wanted the risk, so Crodeet Swish could have had to find an alternative buyer for it by structuring it so that the premium was paid as a coupon to someone willing to take that risk. This called “tail risk recycling” see also: autocalls. Fin.
This is a v interesting thread but 1 thing I don’t get — how is a knock-in put where the barrier is between the strike and the current price any different from a regular put? The prx must go thru the barrier on its way to the strike, if it expires ITM it must have been knocked in
OK I can see that they are different of the option is American rather than European, is that what you are getting at when you say the knock in is cheaper?
its cheaper in $ terms because its contingent. its a parlay so its an binary option on a vanilla European option. “yo, i heard you like options so i sold you an option on an option, bro.”
a barrier not breached essentially models like a 1DTE vanilla, so binary. you essentially do no hedging until you are very very adjacent to the strike and your gamma is very volatile. in practice you essentially don’t hedge in vanillas at all until its breached
Huh my brain must be broken. I feel like a put with strike < spot and a knock-in-put with strike < barrier < spot have the same payoff in all states of the world, so they shd have the same greeks and be hedged in the same way.
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