OPTION GREEKS
PROGRAM OUTLINE
Fischer Black and Myron Scholes are immortalised for their 1973 publication of the coalition formula for European options (work for which the Nobel Prize in Economics was awarded in 1997). The true legacy of that work, however, is not the valuation of options given by the Black-Scholes equation, but the risk measures that are derived from it. These rich measures, commonly called the ‘Greeks’ for the letters used to denote and refer to them, enable the dynamic management of an options’ book. Accurate knowledge of an options’ Greeks is more valuable than accurate knowledge of its value!
We will examine and calculate each of the common Greeks without calculus and describe how they are used to manage and hedge option risk. We will also answer the question: how do option traders make money?
PRE-REQUISTES
An awareness of options pricing, preferably via a course like Basic Option Pricing, part of this series of classes.
CONTENT
Risk measures
• The options dashboard
• Delta – what is hedging all about?
• Is Delta a hedge-ratio, probability, a sensitivity ratio, calculus?
• Vega – what is my exposure to the ‘vol markets’?
• Theta – options are a decaying asset and this costs the trader
• Gamma – is it a win-win situation?
• Busting curve whilst dynamically hedging (in English: how options traders make money)
COURSE DURATION
1 Day
WHO SHOULD TAKE THIS COURSE?
This class is aimed at staff and clients who might be risk managing options or working with those who do or anyone who wants to decipher option ‘trader steak’.
Course accreditation:None
MODULES
These courses are included in this module
OPTION PRICING 1
Understanding options more deeply can be helped by understanding the drivers of their valuation and the realisation of the relationships that exists between the puts and calls. Additionally, when looking at theoretical values, we can observe different driver to ‘forward value’ and ‘uncertainty value’
LEARN MORESTRUCTURED PRODUCTS BASICS
Understand why investors may choose to buy various types of structured products. Understand how a bank provides products with structured payoffs.
GET STARTEDVOLATILITY DERIVATIVES
To understand the ways to trade volatility and in particular to understand the mechanics and uses of variance swaps.
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