|Course Code: 806
|Duration: 1 day
|CPE Credits: 6
|Prerequisite: A basic familiarity with derivatives (contract features as well as related terms and definitions) and basic investment characteristics, gained through either formal training or 1+ years working in a derivative related trading/support capacity is recommended (but not required).
This one-day program is designed to deepen and broaden participants' understanding of the various methodologies for valuing options as well as their use in assessing and managing risk.
The program is intended for participants that already possess a familiarity with options related terminology and have a grasp of put and call basics. The focus of the presentation will be the tools and techniques market participants use to assess option values and strategies as well as understand and manage the risk of trading positions.
The program commences with an overview of option pricing concepts, but quickly moves into a discussion of option price dynamics. These sensitivities, as quantified by the option "greeks", will be described both conceptually and mathematically, but the bulk of the discussion will be on their use in structuring, rebalancing and quantifying the risk of various trading strategies. Particular emphasis will be given to delta (hedge ratios, dynamic hedging, delta neutral, etc.) and vega (implied volatility, the volatility smile and curve, volatility trading, etc.).
The session will also investigate option pricing models (Black-Scholes and binomial) and arbitrage pricing relationships (put/call parity). These will be illustrated initially as methodologies for estimating the theoretically correct price, but then segue to the viewpoint of a trader/portfolio manager employing them as tools to recognize trading opportunities and for assessing/quantifying risks.
Topics for Discussion Include:
Option Pricing, Option "Greeks" & Their Trading Applications
- Option Pricing
- Contract features
- Option value determinants (pricing model inputs)
- Option Pricing Dynamics
- Vega (kappa)
- Trading Applications
- Hedge ratios and delta neutral trading strategies
- Implied volatility, volatility smile and curve, volatility trading
Arbitrage Pricing and Arbitrage Trading Strategies
- Put/ Call Parity
- Conceptual basis - equivalent portfolios
- Arbitrage pricing/trading applications
- Synthetic positions
- Arbitrage trading strategies
- Box spreads
Using Option Pricing Models
- Black-Scholes Model
- Black-Scholes - limiting case of binomial model
- Model inputs and assumptions
- Potential problems with Black- Scholes
- Binomial Pricing Models
- Binomial trees
- Multi stage process
- Types of binomial models
- Mathematics of binomial trees