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An Introduction to Options Trading

Book Description

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.

Table of Contents

  1. The Securities & Investment Institute
  2. Title Page
  3. Copyright Page
  4. Dedication
  5. PREFACE
  6. Acknowledgements
  7. Introduction
  8. Chapter 1 - OPTIONS
    1. 1.1 EXAMPLES
    2. 1.2 AMERICAN VERSUS EUROPEAN OPTIONS
    3. 1.3 TERMINOLOGY
    4. 1.4 EARLY EXERCISE OF AMERICAN OPTIONS
    5. 1.5 PAYOFFS
    6. 1.6 PUT-CALL PARITY
  9. Chapter 2 - THE BLACK – SCHOLES FORMULA
    1. 2.1 VOLATILITY AND THE BLACK-SCHOLES FORMULA
    2. 2.2 INTEREST RATE AND THE BLACK-SCHOLES FORMULA
    3. 2.3 PRICING AMERICAN OPTIONS
  10. Chapter 3 - DIVIDENDS AND THEIR EFFECT ON OPTIONS
    1. 3.1 FORWARDS
    2. 3.2 PRICING OF STOCK OPTIONS INCLUDING DIVIDENDS
    3. 3.3 PRICING OPTIONS IN TERMS OF THE FORWARD
    4. 3.4 DIVIDEND RISK FOR OPTIONS
    5. 3.5 SYNTHETICS
  11. Chapter 4 - IMPLIED VOLATILITY
    1. 4.1 EXAMPLE
    2. 4.2 STRATEGY AND IMPLIED VOLATILITY
  12. Chapter 5 - DELTA
    1. 5.1 DELTA-HEDGING
    2. 5.2 THE MOST DIVIDEND-SENSITIVE OPTIONS
    3. 5.3 EXERCISE-READY AMERICAN CALLS ON DIVIDEND PAYING STOCKS
  13. Chapter 6 - THREE OTHER GREEKS
    1. 6.1 GAMMA
    2. 6.2 THETA
    3. 6.3 VEGA
  14. Chapter 7 - THE PROFIT OF OPTION TRADERS
    1. 7.1 DYNAMIC HEDGING OF A LONG CALL OPTION
    2. 7.2 DYNAMIC HEDGING OF A SHORT CALL OPTION
    3. 7.3 PROFIT FORMULA FOR DYNAMIC HEDGING
    4. 7.4 THE RELATIONSHIP BETWEEN DYNAMIC HEDGING AND θ
    5. 7.5 THE RELATIONSHIP BETWEEN DYNAMIC HEDGING AND θ WHEN THE INTEREST RATE IS STRICTLY POSITIVE
    6. 7.6 CONCLUSION
  15. Chapter 8 - OPTION GREEKS IN PRACTICE
    1. 8.1 INTERACTION BETWEEN GAMMA AND VEGA
    2. 8.2 THE IMPORTANCE OF THE DIRECTION OF THE UNDERLYING SHARE TO THE OPTION GREEKS
    3. 8.3 PIN RISK FOR SHORT-DATED OPTIONS
    4. 8.4 THE RISKIEST OPTIONS TO GO SHORT
  16. Chapter 9 - SKEW
    1. 9.1 WHAT IS SKEW?
    2. 9.2 REASONS FOR SKEW
    3. 9.3 REASONS FOR HIGHER VOLATILITIES IN FALLING MARKETS
  17. Chapter 10 - SEVERAL OPTION STRATEGIES
    1. 10.1 CALL SPREAD
    2. 10.2 PUT SPREAD
    3. 10.3 COLLAR
    4. 10.4 STRADDLE
    5. 10.5 STRANGLE
  18. Chapter 11 - DIFFERENT OPTION STRATEGIES AND WHY INVESTORS EXECUTE THEM
    1. 11.1 THE PORTFOLIO MANAGER’S APPROACH TO OPTIONS
    2. 11.2 OPTIONS AND CORPORATES WITH CROSS-HOLDINGS
    3. 11.3 OPTIONS IN THE EVENT OF A TAKEOVER
    4. 11.4 RISK REVERSALS FOR INSURANCE COMPANIES
    5. 11.5 PRE-PAID FORWARDS
    6. 11.6 EMPLOYEE INCENTIVE SCHEMES
    7. 11.7 SHARE BUY-BACKS
  19. Chapter 12 - TWO EXOTIC OPTIONS
    1. 12.1 THE QUANTO OPTION
    2. 12.2 THE COMPOSITE OPTION
  20. Chapter 13 - REPO
    1. 13.1 A REPO EXAMPLE
    2. 13.2 REPO IN CASE OF A TAKEOVER
    3. 13.3 REPO AND ITS EFFECT ON OPTIONS
    4. 13.4 TAKEOVER IN CASH AND ITS EFFECT ON THE FORWARD
  21. Appendix A - PROBABILITY THAT AN OPTION EXPIRES IN THE MONEY
  22. Appendix B - VARIANCE OF A COMPOSITE OPTION
  23. BIBLIOGRAPHY
  24. INDEX