Adam S. Iqbal

Volatility (eBook, ePUB)

Practical Options Theory

• Format: ePub

Produktbeschreibung

Gain a deep, intuitive and technical understanding of practical options theory The main challenges in successful options trading are conceptual, not mathematical. Volatility: Practical Options Theory provides financial professionals, academics, students and others with an intuitive as well as technical understanding of both the basic and advanced ideas in options theory to a level that facilitates practical options trading. The approach taken in this book will prove particularly valuable to options traders and other practitioners tasked with making pricing and risk management decisions in an environment where time constraints mean that simplicity and intuition are of greater value than mathematical formalism. The most important areas of options theory, namely implied volatility, delta hedging, time value and the so-called options greeks are explored based on intuitive economic arguments alone before turning to formal models such as the seminal Black-Scholes-Merton model. The reader will understand how the model free approach and mathematical models are related to each other, their underlying theoretical assumptions and their implications to level that facilitates practical implementation. There are several excellent mathematical descriptions of options theory, but few focus on a translational approach to convert the theory into practice. This book emphasizes the translational aspect, while first building an intuitive, technical understanding that allows market makers, portfolio managers, investment managers, risk managers, and other traders to work more effectively within--and beyond--the bounds of everyday practice. * Gain a deeper understanding of the assumptions underlying options theory * Translate theoretical ideas into practice * Develop a more accurate intuition for better time-constrained decision making This book allows its readers to gain more than a superficial understanding of the mechanisms at work in options markets. Volatility gives its readers the edge by providing a true bedrock foundation upon which practical knowledge becomes stronger.

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Produktdetails

• Verlag: John Wiley & Sons
• Seitenzahl: 208
• Erscheinungstermin: 4. Oktober 2018
• Englisch
• ISBN-13: 9781119501688
• Artikelnr.: 56980251

Autorenporträt

ADAM S. IQBAL is a Managing Director and Global Head of FX Exotics and Correlation at Goldman Sachs, where he has also served as EMEA Head of G10 FX Options Trading. He has worked as an FX Volatility Portfolio Manager at Pimco, and as an FX options trader at Barclays Investment Bank. He holds a PhD in financial mathematics and financial economics from Imperial College London, an MSc in applied mathematics from Oxford University and an MSci and BA in theoretical physics from Cambridge University.

Inhaltsangabe

Preface xiii

Acknowledgments xv

About the Author xvii

CHAPTER 1 Volatility and Options 1

1.1 What Is an Option? 1

1.2 Options Are Bets on Volatility 3

1.3 Option Premiums and Breakevens 6

1.3.1 Understanding Option Premiums 6

1.3.2 Relation Between Premium and Breakeven 7

1.4 Strike Conventions 9

1.5 What Is Volatility? 10

1.5.1 Implied Volatility, sigmaimplied 11

1.5.2 Probabilities and Breakevens 15

1.5.3 Implied Volatility and Realized Volatility 15

1.5.4 Realized Volatility, ¯sigmarealized 16

1.6 Trader's Summary 19

CHAPTER 2 Understanding Options Without a Model 21

2.1 Vanilla Options 21

2.1.1 Option Payoffs 22

2.2 Making Assumptions 23

2.3 Understanding Vt with Economic Assumptions 24

2.4 Delta and Delta Hedging 25

2.5 The Value Function 26

2.6 Defining Delta 27

2.7 Understanding Delta 30

2.8 Delta as the Probability of an In-the-Money Expiry 32

2.9 Applying Delta as the Probability of an ITM Expiry in Practical Trading 37

2.10 Constructing Vt 38

2.10.1 Jensen's Inequality: Vt = V(St, t, sigmai) >= max(St . K, 0) 40

2.10.2 Trading Intuition Behind Jensen's Inequality 40

2.10.3 American Options 41

2.10.4 Gradient of Vt 42

2.10.5 Drawing Vt 42

2.11 Option Deltas 44

2.12 A Note on Forwards 45

2.13 Put-Call Parity 46

2.14 Trader's Summary 48

CHAPTER 3 The Basic Greeks: Theta 49

3.1 Theta, Theta 50

3.1.1 Overnight Theta for an ATM Option 51

3.1.2 Dependence of Theta(St, t, sigmai) on S¯t 52

3.1.3 Dependence of Theta(St, t, sigmai) on t 60

3.2 Trader's Summary 65

CHAPTER 4 The Basic Greeks: Gamma 67

4.1 Gamma, Gamma 68

4.2 Gamma and Time Decay 70

4.3 Traders' Gamma, Gammatrader 70

4.4 Gamma-Time Decay Trade-offs in More Detail 71

4.5 PnL Explain 73

4.5.1 Example: Gamma, Time Decay, and PnL Explain for a 1-Week Option 73

4.6 Delta Hedging and PnL Variance 76

4.7 Transaction Costs 78

4.8 Daily PnL Explain 79

4.9 The Gamma Profile 81

4.9.1 Gamma and Spot 81

4.9.2 Gamma and Implied Volatility 82

4.9.3 Gamma and Time 83

4.9.4 Total Gamma 84

4.10 Trader's Summary 84

CHAPTER 5 The Basic Greeks: Vega 87

5.1 Vega 88

5.2 Understanding Vega via the PDF 89

5.3 Understanding Vega via Gamma Trading 89

5.4 Vega of an ATMS Option Across Tenors 90

5.5 Vega and Spot 91

5.6 Dependence of Vega on Implied Volatility 94

5.7 Vega Profiles Applied in Practical Options Trading 95

5.8 Vega and PnL Explain 96

5.9 Trader's Summary 97

CHAPTER 6 Implied Volatility and Term Structure 99

6.1 Implied Volatility, ¯sigmaimplied 100

6.2 Term Structure 104

6.3 Flat Vega and Weighted Vega Greeks 104

6.3.1 Flat Vega 105

6.3.2 Weighted Vega 106

6.3.3 Beta-Weighted Vega 108

6.4 Forward Volatility, Forward Variance, and Term Volatility 108

6.4.1 Calculating Implied Forward Volatility 110

6.5 Building a Term Structure Model Using Daily Forward Volatility 111

6.6 Setting Base Volatility Using a Three-Parameter GARCH Model 114

6.6.1 Applying the Three-Parameter Model 116

6.6.2 Limitations of GARCH 117

6.6.3 Risk Management Us