How to Calculate Options Prices and Their GreeksExploring the Black Scholes Model from Delta to Vega
The Wiley Finance Series 1. Aufl.
A unique, in-depth guide to options pricing and valuing their greeks, along with a four dimensional approach towards the impact of changing market circumstances on options How to Calculate Options Prices and Their Greeks is the only book of its kind, showing you how to value options and the greeks according to the Black Scholes model but also how to do this without consulting a model. You'll build a solid understanding of options and hedging strategies as you explore the concepts of probability, volatility, and put call parity, then move into more advanced topics in combination with a four-dimensional approach of the change of the P&L of an option portfolio in relation to strike, underlying, volatility, and time to maturity. This informative guide fully explains the distribution of first and second order Greeks along the whole range wherein an option has optionality, and delves into trading strategies, including spreads, straddles, strangles, butterflies, kurtosis, vega-convexity , and more. Charts and tables illustrate how specific positions in a Greek evolve in relation to its parameters, and digital ancillaries allow you to see 3D representations using your own parameters and volumes. The Black and Scholes model is the most widely used option model, appreciated for its simplicity and ability to generate a fair value for options pricing in all kinds of markets. This book shows you the ins and outs of the model, giving you the practical understanding you need for setting up and managing an option strategy. • Understand the Greeks, and how they make or break a strategy • See how the Greeks change with time, volatility, and underlying • Explore various trading strategies • Implement options positions, and more Representations of option payoffs are too often based on a simple two-dimensional approach consisting of P&L versus underlying at expiry. This is misleading, as the Greeks can make a world of difference over the lifetime of a strategy. How to Calculate Options Prices and Their Greeks is a comprehensive, in-depth guide to a thorough and more effective understanding of options, their Greeks, and (hedging) option strategies.
Preface ix Chapter 1 Introduction 1 Chapter 2 The Normal Probability Distribution 7 Standard deviation in a financial market 8 The impact of volatility and time on the standard deviation 8 Chapter 3 Volatility 11 The probability distribution of the value of a Future after one year of trading 11 Normal distribution versus log-normal distribution 11 Calculating the annualised volatility traditionally 15 Calculating the annualised volatility without ? 17 Calculating the annualised volatility applying the 16% rule 19 Variation in trading days 20 Approach towards intraday volatility 20 Historical versus implied volatility 23 Chapter 4 Put Call Parity 25 Synthetically creating a Future long position, the reversal 29 Synthetically creating a Future short position, the conversion 30 Synthetic options 31 Covered call writing 34 Short note on interest rates 35 Chapter 5 Delta ? 37 Change of option value through the delta 38 Dynamic delta 40 Delta at different maturities 41 Delta at different volatilities 44 20–80 Delta region 46 Delta per strike 46 Dynamic delta hedging 47 The at the money delta 50 Delta changes in time 53 Chapter 6 Pricing 55 Calculating the at the money straddle using Black and Scholes formula 57 Determining the value of an at the money straddle 59 Chapter 7 Delta II 61 Determining the boundaries of the delta 61 Valuation of the at the money delta 64 Delta distribution in relation to the at the money straddle 65 Application of the delta approach, determining the delta of a call spread 68 Chapter 8 Gamma 71 The aggregate gamma for a portfolio of options 73 The delta change of an option 75 The gamma is not a constant 76 Long term gamma example 77 Short term gamma example 77 Very short term gamma example 78 Determining the boundaries of gamma 79 Determining the gamma value of an at the money straddle 80 Gamma in relation to time to maturity, volatility and the underlying level 82 Practical example 85 Hedging the gamma 87 Determining the gamma of out of the money options 89 Derivatives of the gamma 91 Chapter 9 Vega 93 Different maturities will display different volatility regime changes 95 Determining the vega value of at the money options 96 Vega of at the money options compared to volatility 97 Vega of at the money options compared to time to maturity 99 Vega of at the money options compared to the underlying level 99 Vega on a 3-dimensional scale, vega vs maturity and vega vs volatility 101 Determining the boundaries of vega 102 Comparing the boundaries of vega with the boundaries of gamma 104 Determining vega values of out of the money options 105 Derivatives of the vega 108 Vomma 108 Chapter 10 Theta 111 A practical example 112 Theta in relation to volatility 114 Theta in relation to time to maturity 115 Theta of at the money options in relation to the underlying level 117 Determining the boundaries of theta 118 The gamma theta relationship ? 120 Theta on a 3-dimensional scale, theta vs maturity and theta vs volatility 125 Determining the theta value of an at the money straddle 126 Determining theta values of out of the money options 127 Chapter 11 Skew 129 Volatility smiles with different times to maturity 131 Sticky at the money volatility 133 Chapter 12 Spreads 135 Call spread (horizontal) 135 Put spread (horizontal) 137 Boxes 138 Applying boxes in the real market 139 The Greeks for horizontal spreads 140 Time spread 146 Approximation of the value of at the money spreads 148 Ratio spread 149 Chapter 13 Butterfly 155 Put call parity 158 Distribution of the butterfly 159 Boundaries of the butterfly 161 Method for estimating at the money butterfly values 163 Estimating out of the money butterfly values 164 Butterfly in relation to volatility 165 Butterfly in relation to time to maturity 166 Butterfly as a strategic play 166 The Greeks of a butterfly 167 Straddle–strangle or the “Iron fly” 171 Chapter 14 Strategies 173 Call 173 Put 174 Call spread 175 Ratio spread 176 Straddle 177 Strangle 178 Collar (risk reversal, fence) 178 Gamma portfolio 179 Gamma hedging strategies based on Monte Carlo scenarios 180 Setting up a gamma position on the back of prevailing kurtosis in the market 190 Excess kurtosis 191 Benefitting from a platykurtic environment 192 The mesokurtic market 193 The leptokurtic market 193 Transition from a platykurtic environment towards a leptokurtic environment 194 Wrong hedging strategy: Killergamma 195 Vega convexity/Vomma 196 Vega convexity in relation to time/Veta 202 Index 205
PIERINO URSONE has extensive option trading experience. He began his career as a Market Maker with Optiver, an international market maker that trades on all of the world's major financial markets. Afterwards, Ursone ran his own option trading company on the Dutch options exchange in Amsterdam, and after nine years in equity options, he entered the Energy commodity market, trading options on a proprietary basis.
How to Calculate Options Prices and Their Greeks gives options traders, risk managers, fund managers, and private investors an in-depth guide for valuing and understanding options and "the Greeks". This important resource explains the ins and outs of the commonly used Black and Scholes model that is appreciated for its simplicity and ability to generate a fair value for options pricing in all kinds of markets as well as how to calculate/approximate values for options and the Greeks without applying a model. The author outlines a practical approach for using the strengths of the Black and Scholes model to understand, set up, and effectively manage an option position. The author explains, step by step the most effective options and hedging strategies. While other resources rely on an ineffective two dimensional approach to investing in options, Ursone takes a practical, four-dimensional approach that puts the emphasis on the distribution of the Greeks. Greeks measure the sensitivity of the value of an option with regards to changes in parameters like the strike, underlying (Future), volatility (measure of the variation of the underlying), time to expiry or maturity and the interest rate. Any change in one of the parameters will directly result in a change in the Greeks and will have an impact on the P&L of an options portfolio.The author therefore accentuates an understanding of the Greeks as a prerequisite for trading and managing an options portfolio. This informative guide explains the distribution of first and second order Greeks along the whole range wherein an option has optionality, and delves into trading strategies, including spreads, straddles, strangles, butterflies, kurtosis, vega - convexity, and more. The book's illustrative charts and tables clearly show how specific positions in a Greek evolve in relation to its parameters. How to Calculate Options Prices and Their Greeks offers traders at all levels effective strategies that eschew the simplistic two dimensional approach of P&L versus underlying and shows how the Greeks can make a world of difference over the lifetime of an options portfolio. How to Calculate Options Prices and Their Greeks is a comprehensive guide to a thorough and more effective understanding of options, their Greeks, and managing option strategies.
Praise for How to Calculate Options Prices and Their Greeks "Clearly written and easy to read. The book covers all the essential topics and has many very interesting approaches. In my current job, liaising with derivatives trading houses and as a former options trader, I can conclude that the book demonstrates that the Netherlands still functions as an expert area for the options business. How to Calculate Options Prices and Their Greeks has everything in it to become the standard reference book on options. Highly recommended!" —Rogier Elsenburg, Head of Benelux & France Huxley Banking & Financial Services "Pierino Ursone's How to Calculate Options Prices and their Greeks provides a long overdue, comprehensive, and at the same time digestible update to the literature exploring options pricing and strategy. His writing is clear, concise, and straight-forward; unlocking the Holy Grail for the inexperienced and even the most experienced options trader. Ursone liberally illustrates each chapter with graphics and acknowledges the Black Scholes Model's mathematical and theoretical nderpinnings in plain, straight-forward language that makes new understanding of the complexity of options trading possible for both the novice and the expert. Ursone's thorough explanation of the practical application of first and second order greeks goes beyond the simplistic, two-dimensional strategies most traders will find when trying to educate themselves about options. He uses his vast experience and knowledge to act as expert, trader, tactician, and teacher, guiding readers through the markets and allowing them to look inside as they could never before." —Matt Daen, Options Specialist "Finally a holistic guide to options! This practical guide is essential for those seeking an understanding of option derivatives. Beyond merely informative, this handbook for the practitioner details the finer points of the use of options as tools for trading and price-risk management. No professional should be without it." —Dr Tom James, Commodity Market Expert & Author "An easy to read handbook for investors who wish to thoroughly understand, trade and manage an options portfolio. Pierino explains the characteristics and behaviour of options in a pragmatic way, coming from a trading perspective. Very helpful for private and professional investors with a goal of running a complex derivatives portfolio in a controlled manner." —Jelle Elzinga, Former Global Management Committee Optiver Group