Frans de Weert
An Introduction to Options Trading (eBook, PDF)
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Frans de Weert
An Introduction to Options Trading (eBook, PDF)
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Explaining the theory and practice of options from scratch, this book focuses on the practical side of options trading, and deals with hedging of options and how options traders earn money by doing so. Common terms in option theory are explained and readers are shown how they relate to profit. The book gives the necessary tools to deal with options in practice and it includes mathematical formulae to lift explanations from a superficial level. Throughout the book real-life examples will illustrate why investors use option structures to satisfy their needs.
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Explaining the theory and practice of options from scratch, this book focuses on the practical side of options trading, and deals with hedging of options and how options traders earn money by doing so. Common terms in option theory are explained and readers are shown how they relate to profit. The book gives the necessary tools to deal with options in practice and it includes mathematical formulae to lift explanations from a superficial level. Throughout the book real-life examples will illustrate why investors use option structures to satisfy their needs.
Produktdetails
- Produktdetails
- Verlag: John Wiley & Sons
- Seitenzahl: 176
- Erscheinungstermin: 11. Januar 2007
- Englisch
- ISBN-13: 9780470034569
- Artikelnr.: 37290164
- Verlag: John Wiley & Sons
- Seitenzahl: 176
- Erscheinungstermin: 11. Januar 2007
- Englisch
- ISBN-13: 9780470034569
- Artikelnr.: 37290164
Frans de Weert is mathematician by training who is currently working as an equity derivatives trader at Barclays Capital, New York. After obtaining his masters in Mathematics, specializing in probability theory and financial mathematics at the University of Utrecht, he went on to do a research degree, M.Phil, in probability theory at the University of Manchester. After his academic career he started working as trader for Barclays Capital in London. In this role he gained experience in trading many different derivative products on European and American equities. After two and half years in London, he moved to New York to start trading derivatives on both Latin American as well as US underlyings. Frans de Weert lives in New York city.
Preface xiii Acknowledgements xv Introduction xvii 1 OPTIONS 1 1.1 Examples 3 1.2 American versus European options 7 1.3 Terminology 8 1.4 Early exercise of American options 13 1.5 Payoffs 15 1.6 Put-call parity 16 2 THE BLACK-SCHOLES FORMULA 21 2.1 Volatility and the Black-Scholes formula 28 2.2 Interest rate and the Black-Scholes formula 29 2.3 Pricing American options 31 3 DIVIDENDS AND THEIR EFFECT ON OPTIONS 33 3.1 Forwards 34 3.2 Pricing of stock options including dividends 35 3.3 Pricing options in terms of the forward 36 3.4 Dividend risk for options 38 3.5 Synthetics 39 4 IMPLIED VOLATILITY 41 4.1 Example 44 4.2 Strategy and implied volatility 45 5 DELTA 47 5.1 Delta-hedging 52 5.2 The most dividend-sensitive options 57 5.3 Exercise-ready American calls on dividend paying stocks 57 6 THREE OTHER GREEKS 61 6.1 Gamma 62 6.2 Theta 65 6.3 Vega 69 7 THE PROFIT OF OPTION TRADERS 73 7.1 Dynamic hedging of a long call option 74 7.1.1 Hedging dynamically every $1 75 7.1.2 Hedging dynamically every $2 76 7.2 Dynamic hedging of a short call option 77 7.2.1 Hedging dynamically every $1 78 7.2.2 Hedging dynamically every $2 79 7.3 Profit formula for dynamic hedging 80 7.3.1 Long call option 81 7.3.2 Short call option 83 7.4 The relationship between dynamic hedging and Theta 86 7.5 The relationship between dynamic hedging and Theta when the interest rate is strictly positive 88 7.6 Conclusion 91 8 OPTION GREEKS IN PRACTICE 93 8.1 Interaction between gamma and vega 94 8.2 The importance of the direction of the underlying share to the option Greeks 97 8.3 Pin risk for short-dated options 98 8.4 The riskiest options to go short 99 9 SKEW 101 9.1 What is skew? 102 9.2 Reasons for skew 103 9.3 Reasons for higher volatilities in falling markets 104 10 SEVERAL OPTION STRATEGIES 105 10.1 Call spread 106 10.2 Put spread 107 10.3 Collar 109 10.4 Straddle 111 10.5 Strangle 112 11 DIFFERENT OPTION STRATEGIES AND WHY INVESTORS EXECUTE THEM 117 11.1 The portfolio manager's approach to options 118 11.2 Options and corporates with cross-holdings 119 11.3 Options in the event of a takeover 120 11.4 Risk reversals for insurance companies 122 11.5 Pre-paid forwards 123 11.6 Employee incentive schemes 126 11.7 Share buy-backs 126 12 TWO EXOTIC OPTIONS 129 12.1 The quanto option 130 12.2 The composite option 135 13 REPO 137 13.1 A repo example 138 13.2 Repo in case of a takeover 139 13.3 Repo and its effect on options 140 13.4 Takeover in cash and its effect on the forward 141 Appendices A PROBABILITY THAT AN OPTION EXPIRES IN THE MONEY 143 B VARIANCE OF A COMPOSITE OPTION 145 Bibliography 149 Index 151
Preface.
1 Introduction.
2 Options.
2.1 Examples.
2.2 American versus European options.
2.3 Terminology.
2.4 Early exercise of American options.
2.5 Payoffs.
2.6 Put-call Parity.
3 The Black-Scholes Formula.
3.1 Volatility and the Black-Scholes formula.
3.2 Interest rate and the Black-Scholes formula.
3.3 Pricing American options.
4 Dividends and its effects on options.
4.1 Forwards.
4.2 Pricing of stock options including dividends.
4.3 Pricing options in terms of the forward.
4.4 Dividend risk for options.
4.5 Synthetics.
5 Implied Volatility.
5.1 Example.
5.2 Strategy and implied volatility.
6 Delta.
6.1 Delta hedging.
6.2 The most dividend sensitive options.
6.3 Exercise-ready American calls in dividend paying stocks.
7 Three other Greeks.
7.1 Gamma.
7.2 Theta.
7.3 Vega.
8 The profit of option traders.
8.1 Dynamic hedging of a long call option.
8.2 Dynamic hedging of a short call option.
8.3 Profit formula for dynamic formula.
8.4 The relationship between dynamic hedging and q.
8.5 The relationship between dynamic hedging and q when the interest rate is strictly positive.
8.6 Conclusion.
9 Option Greeks in practice.
9.1 Interaction between Gamma and Vega.
9.2 The importance of the direction of the underlying share to the option Greeks.
9.3 Pin risk for short dated options.
9.4 The riskiest options to go short.
10 Skew.
10.1 What is skew?
10.2 Reason for skew.
10.3 Reason for higher volatilities in falling markets.
11 Several options strategies.
11.1 Call spread.
11.2 Put spread.
11.3 Collar.
11.4 Straddle.
11.5 Strangle.
12 The different option strategies and why investors execute them.
12.1 The portfolio manager's approach to options.
12.2 Options and Corporates with cross-holdings.
12.3 Options in case of a takeover.
12.4 Risk reversals for insurance companies.
12.5 Pre-paid forwards.
12.6 Employee incentive schemes.
12.7 Share Buy-backs.
13 Two exotic options.
13.1 The quanto option.
13.2 The composite option.
14 Repo.
14.1 A repo example.
14.2 Repo in case of a takeover.
14.3 Repo and its effect on options.
14.4 Takeover in cash and its effect on the forward.
A Appendix I: Probability that an option expires in the money.
B Appendix II: Variance of a composite option.
References.
1 Introduction.
2 Options.
2.1 Examples.
2.2 American versus European options.
2.3 Terminology.
2.4 Early exercise of American options.
2.5 Payoffs.
2.6 Put-call Parity.
3 The Black-Scholes Formula.
3.1 Volatility and the Black-Scholes formula.
3.2 Interest rate and the Black-Scholes formula.
3.3 Pricing American options.
4 Dividends and its effects on options.
4.1 Forwards.
4.2 Pricing of stock options including dividends.
4.3 Pricing options in terms of the forward.
4.4 Dividend risk for options.
4.5 Synthetics.
5 Implied Volatility.
5.1 Example.
5.2 Strategy and implied volatility.
6 Delta.
6.1 Delta hedging.
6.2 The most dividend sensitive options.
6.3 Exercise-ready American calls in dividend paying stocks.
7 Three other Greeks.
7.1 Gamma.
7.2 Theta.
7.3 Vega.
8 The profit of option traders.
8.1 Dynamic hedging of a long call option.
8.2 Dynamic hedging of a short call option.
8.3 Profit formula for dynamic formula.
8.4 The relationship between dynamic hedging and q.
8.5 The relationship between dynamic hedging and q when the interest rate is strictly positive.
8.6 Conclusion.
9 Option Greeks in practice.
9.1 Interaction between Gamma and Vega.
9.2 The importance of the direction of the underlying share to the option Greeks.
9.3 Pin risk for short dated options.
9.4 The riskiest options to go short.
10 Skew.
10.1 What is skew?
10.2 Reason for skew.
10.3 Reason for higher volatilities in falling markets.
11 Several options strategies.
11.1 Call spread.
11.2 Put spread.
11.3 Collar.
11.4 Straddle.
11.5 Strangle.
12 The different option strategies and why investors execute them.
12.1 The portfolio manager's approach to options.
12.2 Options and Corporates with cross-holdings.
12.3 Options in case of a takeover.
12.4 Risk reversals for insurance companies.
12.5 Pre-paid forwards.
12.6 Employee incentive schemes.
12.7 Share Buy-backs.
13 Two exotic options.
13.1 The quanto option.
13.2 The composite option.
14 Repo.
14.1 A repo example.
14.2 Repo in case of a takeover.
14.3 Repo and its effect on options.
14.4 Takeover in cash and its effect on the forward.
A Appendix I: Probability that an option expires in the money.
B Appendix II: Variance of a composite option.
References.
Preface xiii Acknowledgements xv Introduction xvii 1 OPTIONS 1 1.1 Examples 3 1.2 American versus European options 7 1.3 Terminology 8 1.4 Early exercise of American options 13 1.5 Payoffs 15 1.6 Put-call parity 16 2 THE BLACK-SCHOLES FORMULA 21 2.1 Volatility and the Black-Scholes formula 28 2.2 Interest rate and the Black-Scholes formula 29 2.3 Pricing American options 31 3 DIVIDENDS AND THEIR EFFECT ON OPTIONS 33 3.1 Forwards 34 3.2 Pricing of stock options including dividends 35 3.3 Pricing options in terms of the forward 36 3.4 Dividend risk for options 38 3.5 Synthetics 39 4 IMPLIED VOLATILITY 41 4.1 Example 44 4.2 Strategy and implied volatility 45 5 DELTA 47 5.1 Delta-hedging 52 5.2 The most dividend-sensitive options 57 5.3 Exercise-ready American calls on dividend paying stocks 57 6 THREE OTHER GREEKS 61 6.1 Gamma 62 6.2 Theta 65 6.3 Vega 69 7 THE PROFIT OF OPTION TRADERS 73 7.1 Dynamic hedging of a long call option 74 7.1.1 Hedging dynamically every $1 75 7.1.2 Hedging dynamically every $2 76 7.2 Dynamic hedging of a short call option 77 7.2.1 Hedging dynamically every $1 78 7.2.2 Hedging dynamically every $2 79 7.3 Profit formula for dynamic hedging 80 7.3.1 Long call option 81 7.3.2 Short call option 83 7.4 The relationship between dynamic hedging and Theta 86 7.5 The relationship between dynamic hedging and Theta when the interest rate is strictly positive 88 7.6 Conclusion 91 8 OPTION GREEKS IN PRACTICE 93 8.1 Interaction between gamma and vega 94 8.2 The importance of the direction of the underlying share to the option Greeks 97 8.3 Pin risk for short-dated options 98 8.4 The riskiest options to go short 99 9 SKEW 101 9.1 What is skew? 102 9.2 Reasons for skew 103 9.3 Reasons for higher volatilities in falling markets 104 10 SEVERAL OPTION STRATEGIES 105 10.1 Call spread 106 10.2 Put spread 107 10.3 Collar 109 10.4 Straddle 111 10.5 Strangle 112 11 DIFFERENT OPTION STRATEGIES AND WHY INVESTORS EXECUTE THEM 117 11.1 The portfolio manager's approach to options 118 11.2 Options and corporates with cross-holdings 119 11.3 Options in the event of a takeover 120 11.4 Risk reversals for insurance companies 122 11.5 Pre-paid forwards 123 11.6 Employee incentive schemes 126 11.7 Share buy-backs 126 12 TWO EXOTIC OPTIONS 129 12.1 The quanto option 130 12.2 The composite option 135 13 REPO 137 13.1 A repo example 138 13.2 Repo in case of a takeover 139 13.3 Repo and its effect on options 140 13.4 Takeover in cash and its effect on the forward 141 Appendices A PROBABILITY THAT AN OPTION EXPIRES IN THE MONEY 143 B VARIANCE OF A COMPOSITE OPTION 145 Bibliography 149 Index 151
Preface.
1 Introduction.
2 Options.
2.1 Examples.
2.2 American versus European options.
2.3 Terminology.
2.4 Early exercise of American options.
2.5 Payoffs.
2.6 Put-call Parity.
3 The Black-Scholes Formula.
3.1 Volatility and the Black-Scholes formula.
3.2 Interest rate and the Black-Scholes formula.
3.3 Pricing American options.
4 Dividends and its effects on options.
4.1 Forwards.
4.2 Pricing of stock options including dividends.
4.3 Pricing options in terms of the forward.
4.4 Dividend risk for options.
4.5 Synthetics.
5 Implied Volatility.
5.1 Example.
5.2 Strategy and implied volatility.
6 Delta.
6.1 Delta hedging.
6.2 The most dividend sensitive options.
6.3 Exercise-ready American calls in dividend paying stocks.
7 Three other Greeks.
7.1 Gamma.
7.2 Theta.
7.3 Vega.
8 The profit of option traders.
8.1 Dynamic hedging of a long call option.
8.2 Dynamic hedging of a short call option.
8.3 Profit formula for dynamic formula.
8.4 The relationship between dynamic hedging and q.
8.5 The relationship between dynamic hedging and q when the interest rate is strictly positive.
8.6 Conclusion.
9 Option Greeks in practice.
9.1 Interaction between Gamma and Vega.
9.2 The importance of the direction of the underlying share to the option Greeks.
9.3 Pin risk for short dated options.
9.4 The riskiest options to go short.
10 Skew.
10.1 What is skew?
10.2 Reason for skew.
10.3 Reason for higher volatilities in falling markets.
11 Several options strategies.
11.1 Call spread.
11.2 Put spread.
11.3 Collar.
11.4 Straddle.
11.5 Strangle.
12 The different option strategies and why investors execute them.
12.1 The portfolio manager's approach to options.
12.2 Options and Corporates with cross-holdings.
12.3 Options in case of a takeover.
12.4 Risk reversals for insurance companies.
12.5 Pre-paid forwards.
12.6 Employee incentive schemes.
12.7 Share Buy-backs.
13 Two exotic options.
13.1 The quanto option.
13.2 The composite option.
14 Repo.
14.1 A repo example.
14.2 Repo in case of a takeover.
14.3 Repo and its effect on options.
14.4 Takeover in cash and its effect on the forward.
A Appendix I: Probability that an option expires in the money.
B Appendix II: Variance of a composite option.
References.
1 Introduction.
2 Options.
2.1 Examples.
2.2 American versus European options.
2.3 Terminology.
2.4 Early exercise of American options.
2.5 Payoffs.
2.6 Put-call Parity.
3 The Black-Scholes Formula.
3.1 Volatility and the Black-Scholes formula.
3.2 Interest rate and the Black-Scholes formula.
3.3 Pricing American options.
4 Dividends and its effects on options.
4.1 Forwards.
4.2 Pricing of stock options including dividends.
4.3 Pricing options in terms of the forward.
4.4 Dividend risk for options.
4.5 Synthetics.
5 Implied Volatility.
5.1 Example.
5.2 Strategy and implied volatility.
6 Delta.
6.1 Delta hedging.
6.2 The most dividend sensitive options.
6.3 Exercise-ready American calls in dividend paying stocks.
7 Three other Greeks.
7.1 Gamma.
7.2 Theta.
7.3 Vega.
8 The profit of option traders.
8.1 Dynamic hedging of a long call option.
8.2 Dynamic hedging of a short call option.
8.3 Profit formula for dynamic formula.
8.4 The relationship between dynamic hedging and q.
8.5 The relationship between dynamic hedging and q when the interest rate is strictly positive.
8.6 Conclusion.
9 Option Greeks in practice.
9.1 Interaction between Gamma and Vega.
9.2 The importance of the direction of the underlying share to the option Greeks.
9.3 Pin risk for short dated options.
9.4 The riskiest options to go short.
10 Skew.
10.1 What is skew?
10.2 Reason for skew.
10.3 Reason for higher volatilities in falling markets.
11 Several options strategies.
11.1 Call spread.
11.2 Put spread.
11.3 Collar.
11.4 Straddle.
11.5 Strangle.
12 The different option strategies and why investors execute them.
12.1 The portfolio manager's approach to options.
12.2 Options and Corporates with cross-holdings.
12.3 Options in case of a takeover.
12.4 Risk reversals for insurance companies.
12.5 Pre-paid forwards.
12.6 Employee incentive schemes.
12.7 Share Buy-backs.
13 Two exotic options.
13.1 The quanto option.
13.2 The composite option.
14 Repo.
14.1 A repo example.
14.2 Repo in case of a takeover.
14.3 Repo and its effect on options.
14.4 Takeover in cash and its effect on the forward.
A Appendix I: Probability that an option expires in the money.
B Appendix II: Variance of a composite option.
References.