Vanilla Options – Mechanics, Analysis and Strategies

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Introduction to Option Markets and Instruments

• Option Definitions and Mechanics
• Types of Options and their Pay-Offs
• How Options are Traded
• Option Glossary – the Language of the Market
• Overview of Option Applications

Option Pricing and Risk Assessment

• Closer Look at Option Pay-Off Profiles
  • Value Diagrams
  • P&L Diagrams
• Pricing Basics
  • Minimum Option Value
  • The Put/Call Parity
  • "Intrinsic" and "Time Value"
• Important Statistics in Option Pricing
  • Probability Distributions and Volatility
• The Black-Scholes/Black Models
• The Garman-Kohlhagen Model (Currency Options)
• Option Price Sensitivities ("Greeks")
• Computer Simulations and Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Option Pricing and Risk Assessment (Continued)

• Introduction to Numerical Option Pricing
• "Risk Neutral" Pricing
• Numerical Model for Pricing of Stock Options (Cox-Ross-Rubinstein)
  • Modelling the Behaviour of Stock Prices
  • Setting up the Pay-off Tree
  • Calculating Option Pay-Offs
  • Valuing European and American Call and Put options
  • Calculating the "Greeks" in the CRR Model
  • Valuing Currency Options Using the CRR Model
• Numerical Models for Valuing Interest Rate Options
  • The Vasicek Model
  • The BDT Model
  • The Hull-White (Extended Vasicek) Model
• Computer Simulations
• Exercises

Day Two

09.00 - 09.15 Brief recap

09.15 - 12.00 Trading with Options

• The Trading Process
  • Formulating Expectations
  • Establishing a Risk Profile
  • Search and Selection of Strategies
• Bull strategies
  • Long Call, Short Put, Bull Spread, Long Synthetic Future, Long Semi-Future
• Bear strategies
  • Long Put, Short Call, Bear Spread, Short Synthetic Future, Short Semi-Future
• Volatility Strategies
  • Straddles and Strangles
  • Butterflies and Condors
• Workshop: Design Butterfly
• Workshop: "Twin Peaks"
• Spread Trading
  • Intra-Market and Inter-Market Spreads
  • Calendar Spreads
  • Follow-up Strategies
• Computer Simulations and Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Hedging with Options

• The Hedging Process
• Single Position "One-to-One" Hedge
  • "Protective Put"
  • "Covered Call"
• Portfolio Hedging
  • Hedging a Portfolio of Stocks
  • Hedging a Portfolio of Bonds
  • Hedging a Currency Position
• Hedging Uncertain and Contingent Cash flows
• Dynamic Hedging Strategies
• Hedging of Market-maker Positions in Options
  • Delta-Hedging of Options Positions
  • Hedging of Gamma and Vega Risks
  • The Problem with Fat Tails
• Exercises

Evaluation and Termination of the Seminar