An Introduction to Options Trading

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.

Auteur

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.

Texte du rabat
An Introduction to Options Trading is a pleasurable book to read. The simplicity of the language and exposition make it accessible to a wide spectrum of interested readers, especially to option traders. Although no rigorous mathematics is discussed in this book, the formulas used are well motivated and explained. Karma Dajani, Utrecht University, The Netherlands

An Introduction to Options Trading is one of the first books to explain where the profit of option traders really comes from. Although people usually assume that this profit relates to bid-offer spreads, this book actually shows that there is a much more sophisticated way of making money when trading options.

This book shows why investors use option structures to satisfy their needs, and what practical implications these option structures have on the trader.

Explaining the theory and practice of options trading from scratch, the reader will quickly become familiar with delta hedging, gamma, vega and theta and how these terms relate to the trader's profit. Throughout the book real-life examples will be used to explain the practicalities of options bringing the theory behind options to life.

After reading An Introduction to Options Trading the reader will understand how options can be tailored to an investor's needs. The book will give the reader an understanding of the incredible potential of making money through options and will equip him with the necessary tools to deal with options in practice.

Contenu

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 Putcall parity 16

2 THE BLACKSCHOLES FORMULA 21

2.1 Volatility and the BlackScholes formula 28

2.2 Interest rate and the BlackScholes 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 86

7.5 The relationship between dynamic hedging and 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