Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Edition

Cover
Title Page
Copyright Page
Contents
Preface
1 Financial Contracts
	Buying and Selling
	Notional Value of a Forward Contract
	Settlement Procedures
	Market Integrity
2 Forward Pricing
	Physical Commodities (Grains, Energy Products, Precious Metals, etc.)
	Stock
	Bonds and Notes
	Foreign Currencies
	Stock and Futures Options
	Arbitrage
	Dividends
	Short Sales
3 Contract Specifications and Option Terminology
	Contract Specifications
	Option Price Components
4 Expiration Profit and Loss
	Parity Graphs
5 Theoretical Pricing Models
	The Importance of Probability
	A Simple Approach
	The Black-Scholes Model
6 Volatility
	Random Walks and Normal Distributions
	Mean and Standard Deviation
	Forward Price as the Mean of a Distribution
	Volatility as a Standard Deviation
	Scaling Volatility for Time
	Volatility and Observed Price Changes
	A Note on Interest-Rate Products
	Lognormal Distributions
	Interpreting Volatility Data
7 Risk Measurement I
	The Delta
	The Gamma
	The Theta
	The Vega
	The Rho
	Interpreting the Risk Measures
8 Dynamic Hedging
	Original Hedge
9 Risk Measurement II
	Delta
	Theta
	Vega
	Gamma
	Lambda (Λ)
10 Introduction to Spreading
	What Is a Spread?
	Option Spreads
11 Volatility Spreads
	Straddle
	Strangle
	Butterfly
	Condor
	Ratio Spread
	Christmas Tree
	Calendar Spread
	Time Butterfly
	Effect of Changing Interest Rates and Dividends
	Diagonal Spreads
	Choosing an Appropriate Strategy
	Adjustments
	Submitting a Spread Order
12 Bull and Bear Spreads
	Naked Positions
	Bull and Bear Ratio Spreads
	Bull and Bear Butterflies and Calendar Spreads
	Vertical Spreads
13 Risk Considerations
	Volatility Risk
	Practical Considerations
	How Much Margin for Error?
	Dividends and Interest
	What Is a Good Spread?
14 Synthetics
	Synthetic Underlying
	Synthetic Options
	Using Synthetics in a Spreading Strategy
	Iron Butterflies and Iron Condors
15 Option Arbitrage
	Options on Futures
	Locked Futures Markets
	Options on Stock
	Arbitrage Risk
16 Early Exercise of American Options
	Arbitrage Boundaries
	Early Exercise of Call Options on Stock
	Early Exercise of Put Options on Stock
	Impact of Short Stock on Early Exercise
	Early Exercise of Options on Futures
	Protective Value and Early Exercise
	Pricing of American Options
	Early Exercise Strategies
	Early Exercise Risk
17 Hedging with Options
	Protective Calls and Puts
	Covered Writes
	Collars
	Complex Hedging Strategies
	Hedging to Reduce Volatility
	Portfolio Insurance
18 The Black-Scholes Model
	n(x) and N(x)
	A Useful Approximation
	The Delta
	The Theta
	Maximum Gamma, Theta, and Vega
19 Binomial Option Pricing
	A Risk-Neutral World
	Valuing an Option
	The Delta
	The Gamma
	The Theta
	Vega and Rho
	The Values of u and d
	Gamma Rent
	American Options
	Dividends
20 Volatility Revisited
	Historical Volatility
	Volatility Forecasting
	Implied Volatility as a Predictor of Future Volatility
	Forward Volatility
21 Position Analysis
	Some Thoughts on Market Making
	Stock Splits
22 Stock Index Futures and Options
	What Is an Index?
	Stock Index Futures
	Stock Index Options
23 Models and the Real World
	Markets Are Frictionless
	Interest Rates Are Constant over the Life of an Option
	Volatility Is Constant over the Life of the Option
	Trading Is Continuous
	Expiration Straddles
	Volatility Is Independent of the Price of the Underlying Contract
	Underlying Prices at Expiration Are Lognormally Distributed
	Skewness and Kurtosis
24 Volatility Skews
	Modeling the Skew
	Skewness and Kurtosis
	Skewed Risk Measures
	Shifting the Volatility
	Skewness and Kurtosis Strategies
	Implied Distributions
25 Volatility Contracts
	Realized Volatility Contracts
	Implied Volatility Contracts
	Trading the VIX
	Replicating a Volatility Contract
	Volatility Contract Applications
Afterword: A Final Thought
A: Glossary of Option Terminology
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	B
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B: Some Useful Math
	Rate-of-Return Calculations
	Normal Distributions and Standard Deviation
	Volatility
Index
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