Intermediate Options: Beyond the Basics
December 7, 2012 May 16, 2012
Registration Fee: US$995.00 Register Location Instructor
Many classes sell out; we suggest registering at least one week in advance to ensure availability.
Intermediate Level, 7 CPE Credits
Instructor: David Oakes
Hours: 9:00 am - 5:00 pm; Registration/Breakfast begins at 8:30 am
Options offer many interesting opportunities for trading views on the direction and volatility of prices. But tracking and controlling the risk of options positions in fast-moving markets can be difficult, and the models that we use to measure option risks are not always well understood by market participants.
In this interactive course, we go beyond the basics of options to explain how option risk measures are related to underlying market conditions, how control of risk drives profitability in options trading strategies, and how models can help us interpret and understand these relationships. Attending the course will help you develop a better understanding of what it means to trade volatility, improve your ability to use and interpret option pricing models, and give you insight into the process of running an options trading book or portfolio.
Session 1: Pricing and Hedging Options
In this first session, we review and develop key concepts related to the pricing and hedging of options. By the end of the session, you will be able to:
- Explain why option prices are related to hedging costs
- Explain why options can be priced using risk-neutral valuation methods
- Show how these methods are used to estimate option prices in the binomial model, through simulation methods (Monte Carlo) and in the Black-Scholes model
Session 2: Greeks
In this session, we identify factors that drive option prices and discuss option risk measures (the ‘Greeks’) that related to these factors. By the end of the session, you will be able to:
- Identify the main factors that influence option prices
- Define and interpret key option price sensitivities (delta, gamma, vega, theta) and explain how they are used
Session 3: Volatility
In this session, we explain how option pricing models are used to help us interpret and understand the market views of expected volatility that are implied by option prices and to identify potentially profitable trading opportunities. By the end of the session, you will be able to:
- Explain how implied volatility is calculated
- Outline the typical characteristics of implied volatility smile or skew and term structure in options on equity, interest rates and other underlying sources of risk
- Explain how and why option pricing models are calibrated to the implied volatility surface
- Show how the relationship between expected and actual volatility affects the profitability of delta hedging strategies for options, and explain how this is related to the prices at which market participants will be willing to trade options
- Construct and analyze options trading strategies that express directional views, outright and relative value views on volatility, and views on the volatility skew or smile.
Session 4: Running an Options Trading Book
In this session, we show how the ideas developed in the previous sessions can be applied to running an options trading book or portfolio. By the end of the session, you will be able to:
- Explain how to manage an option book while staying delta neutral
- Analyze vega in the context of an options portfolio
- Explain the importance of gamma and its relation to delta
- Discuss the limits required to run an options book successfull