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Back To Basics - Part I
2007-11-01 12:18:00 When participating in a forum about option trading, I have noticed that some of the participants did not know about a few basics relations in pricing options. The question I saw was a long the line of “The difference between Call 100 and Call 90 looks very big to me”. It had occured to me that ...
Back To Basics - Part I
2007-11-01 12:18:00 When participating in a forum about option trading, I have noticed that some of the participants did not know about a few basics relations in pricing options. The question I saw was a long the line of “The difference between Call 100 and Call 90 looks very big to me”. It had occured to me that ...
Is the delta a good measure of risk?
2007-08-28 14:40:00 For those who do not know, the delta is the sensitivity of an option to a movement of the underlying. This can be extended to a portfolio in which the delta reflects the sensitivity of the portfolio to the underlying. It is usually the case that the delta is given to us by the software ...
Is the delta a good measure of risk?
2007-08-28 14:40:00 For those who do not know, the delta is the sensitivity of an option to a movement of the underlying. This can be extended to a portfolio in which the delta reflects the sensitivity of the portfolio to the underlying. It is usually the case that the delta is given to us by the software ... More on this topic (What's this?) Position Sizing: How to Limit Risk & Maximize Gains (Investment U, 7/28/09) Another Lehman Mess: No One Can Run the Software (naked capitalism, 9/11/09) Thinkorswim Software Platform Update (LongShortTrader, 9/12/09) Read more on Risk, Computer Software at Wikinvest
Black-Scholes Options Pricing Model
2007-07-28 08:48:00 Black-Scholes model or Black-Scholes-Merton model was formulated in 1973 by Black, Scholes and Merton. The theory became widely popular and is some extend responsible for the current popularity of the derivates. Black-Scholes model and its variations are still widely used by options traders.The underlying assumption of the Black-Scholes option price is that the price volatility of the underlying instruments follow a pattern and can be predictable. Thus by incorporating this volatility (implied volatility) value with time to options? expiration, options? strike price and time value of money, one can figure out the options price variation. Traders can also calculate the possible volatility if the options price is known. The results are expressed as Options Greeks consisting of Vega, Delta and Theta.The Black-Scholes options pricing model does not consider the arbitrage of underlying instruments, the taxes and fees involved in trading and earnings from the underlying equity. The model ...
Black and Scholes Imperfections
2007-06-18 20:52:00 I am currently reading a very interesting book by Jean-Philippe Bouchaud called “Theory of financial risks”. It is very recommended if you are mathematically inclined. The book tries to build option pricing from a different angle than the classical replication argument. These include assumption of continuous trading, constant volatility throughout the life of the option ...
Are Returns Log-Normally Distributed?
2007-06-14 19:49:00 If you ever heard the term “Log Normal Returns” and you wondered what it means, this post is for you. I’d also throw in a graph just for you. Why assume anything to begin with? Good question. Before I tackle the question on why it is assumed (in most cases) that returns are log-normally distributed, we ...
The Volatility Smile
2007-06-03 19:27:00 This post discusses what is the volatility smile and why should you care as a trader about it. I’ll keep it as simple as possible in order not to get into technicalities which won’t add anything to the understanding of the subject anyway. Black and Schole’s World If we consider the Black and Scholes’ world, we ...
Black & Scholes For Dummies - How To Do It Manually And With Excel
2007-04-04 00:00:00 This post is about simply making the formula work. First manually, then with excel. At the end of this post there is an excel file I had put. Why you need to know how to make the formula work yourself? Because this way, you’d understand the mechanism better, and it’s weakness. So without further ado, the ... |
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