Fundamentals Of Pricing And Trading Options

Get to grips with pricing and trading options

Course Highlights

Complicated issues were explained with remarkable clarity.

J.G., ABN Amro

create trading strategies using options, spreads and combinations
exploit arbitrage opportunities using options
develop an intuitive approach to option pricing and valuation
fully understand option sensitivities and clarify the potential of embedded options
deal with exotic option pricing and analytic approaches
develop a portfolio of options and analyse risk

For details of the course trainer, please download the course brochure

Booking Information

Dates	Prices	Book This Course	Discount
18 - 20 Nov 2009	£ 2199		-

Course Programme

Complicated issues were explained with remarkable clarity.

J.G., ABN Amro

Generally a very good course, it fulfilled my expectations perfectly

H.H., Syneco

Topics were explained clearly, concisely and in context with participants' questions and occupations. Good examples given.

S.S., Macquarie Bank

Fundamental properties and concepts

Forwards, Futures (Outrights) and Options
Non-linearity - asymmetry of option returns
Option 'pay-off' profiles

The fundamentals of options markets

Exchange traded and over-the-counter (OTC) option markets
FX, interest rate, equity and commodity options
Warrants and convertibles

Basic option market terminology and characteristics

Call and put options
European, American, Asian and Bermudan options
Intrinsic value and time value
In-, at- and out-of-the-money terminology
Principles and determinants of option pricing

A practical introduction to using options - hedging and trading strategies

Put-Call parity
- risk reversals; synthetic forwards and options
- range forwards and participating forwards
- profiting from put-call parity violation
Financial trading strategies using options
- covered calls - enhancing portfolio returns
- protective puts - guaranteeing portfolio returns
Spreads and combinations
- call and put (Bull and Bear) spreads
- straddles and strangles
- butterfly and condor spreads
Exploiting arbitrage opportunities

Workshop:
Option trading strategies
Practical application of options in a range of hedging and trading strategies

Introduction To Option Valuation - Principles and Option Pricing Models

Simple probability theory and decision analysis - application to stochastic processes
Statistical measures: mean and variance
Binomial model - arbitrage-free derivation
- assumptions of the binomial model
- dividend and non-dividend paying stocks
- American and other path dependent options
Volatility and time parameters in the binomial model; value determinants, price sensitivities
The Black-Scholes option pricing model
Continuous stochastic processes; Brownian motion
Underlying concepts, assumptions and derivation of the Black-Scholes pricing model
Option price determinants: strike price, spot price, volatility, maturity, interest rates
Black (1976) formula for options on forwards
Application to commodity, equity and interest rate options
FX options; Garman-Kohlhagen pricing
Interest rate options - term structure models
Strengths and weaknesses of Black-Scholes
Pricing of path dependent options
Jump-diffusion models
Option valuation - Monte Carlo simulation

Workshop:
Option pricing exercises
Construction of simple binomial model - application to European and American style options; pricing using Black-Scholes model and Monte Carlo simulation. Structuring and analysis of trading strategies

Volatility trading

Understanding volatility; the role of volatility in option pricing; volatility as an 'asset class'
Historic, implied and actual volatility measures
Computing volatility: analysis of data samples; sample sizes; weighting sample data
Forecasting volatility: (GARCH) techniques
Volatility smiles and skews
Term structure of volatility
Volatility trading strategies
- vega trading: volatility 'cones'

Option Price Sensitivities; Hedging and Risk Analysis of Option Positions

Delta, gamma, vega, theta, rho
Delta hedging and risk analysis
- dynamic risk management using delta
- delta hedging an option portfolio
Gamma; 2nd order option price sensitivity
Understanding gamma; gamma characteristics of in-, at- and out-of-the-money options
Limitations of delta hedging
- gamma effects
- construction of robust hedges
- immunisation of risk using gamma hedging
Gamma trading - real volatility trading
Theta; option price time decay
Interrelationships between option price sensitivities
- the theta-gamma trade-off
Active management of portfolio delta, gamma and vega risks

Workshop:
Running a portfolio of options - delta hedging; vega trading
Dynamic delta hedging of portfolio of options; analysis of simple volatility trading strategy

Interest rate options

The OTC interest rate options market
IRGs, caps and floors
Swap options and bond options
Collars; participating caps; Corridors
Pricing and hedging caps and floors
- interest rate option pricing models
- volatility term structures
- cap/floor-swap parity
- delta hedging caps and floors
Practical applications of interest rate options
- asset and liability risk management
- volatility trading; enhancing portfolio returns
Embedded caps and floors; Reverse FRNs
Extendable and cancellable swaps
Callable and putable bonds

Workshop:
Pricing interest caps, floors and collars and their applications in risk management

Currency options - Garman-Kohlhagen pricing
Market conventions, terminology, quotation
Applications in currency risk management
Simple trading and hedging strategies
Embedded options e.g. dual currency bonds
Equity and equity index options; warrants
Applications in trading; portfolio management
Synthetic equity investments
Commodity options - zero cost collars and participating forwards

Exotic options

Applications across equity, interest rate, commodity and FX markets
Motivations and applications of exotic options
- trading strategies; leverage
- hedging corporate exposures
Digital (binary) options
- pricing and risk management
- applications - 'Range' structures
Barrier (knock-in and knock-out options)
- pricing using numerical techniques
Asian (average rate/price) options
- pricing and hedging average rate options
Multi-asset exotic options
- basket; spread and rainbow options

Embedded Option Structures

Structured notes; securities with embedded option features
Use and applications of embedded derivatives
Rationale for borrowers and investors
- yield enhancement
- range notes - speculating on volatility
- guaranteeing and enhancing returns
Financial engineering; analysing structured debt
Analysis of a range of structured notes
- range FRNs (FX and LIBOR based)
- commodity (and other asset) linked notes
- capital guarantee equity linked structures

PERCs, ELKs and DECs

Case Study:
Examples of structured products; reverse engineering and analysis