Derivatives09-2 - Option Analysis and Modeling

Derivatives09-2 - Option Analysis and Modeling - FINA222...

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FINA222 Derivative Securities Session 2 Option Analysis and Modeling The Binomial Tree Approach
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Session Outline Options Trading Strategy Involving Options Modeling the Stochastic Process for Derivative Analysis Binomial Tree Approach to Option Modeling When Valuation is not Risk-Neutral Volatility of Asset Prices General Applicability of the Binomial Model
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 10.3 Trading Strategies Involving Options
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 10.4 Three Alternative Strategies Take a position in the option and the underlying Take a position in 2 or more options of the same type (A spread) Combination: Take a position in a mixture of calls & puts (A combination)
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Options Just like Lego Let’s start with the fundamentals But, you have to use the following: Technical Analysis , Pricing of Plain Vanilla, and Greeks , such as, Delta, Gamma, and Rho?
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The building blocks of Options Modern finance is particle finance. We decompose, then recompose.
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Stock price P L
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LONG CALL SHORT PUT LONG PUT SHORT CALL Stock price P L
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Different strike Different ratio
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Understanding the instruments (Vector analysis) Type\price Number Up 1 Down 1 K Long 1 +1 -1 100 Short 1 -1 +1 100 Long call 1 +1 0 100 Short call 1 -1 0 100 Long put 1 0 +1 100 Short put 1 0 -1 100 Sum 0 0
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 10.11 Positions in an Option & the Underlying Profit S T K Profit S T K Profit S T K Profit S T K (a) (b ) (c ) (d )
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 10.12 Bull Spread Using Calls K 1 K 2 Profit S T
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 10.13 Bull Spread Using Puts K 1 K 2 Profit S T
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 10.14 Bear Spread Using Puts K 1 K 2 Profit S T
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 10.15 Bear Spread Using Calls K 1 K 2 Profit S T
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 10.16 Box Spread A combination of a bull call spread and a bear put spread If all options are European a box spread is worth the present value of the difference between the strike prices If they are American this is not necessarily so
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 10.17 Butterfly Spread Using Calls K 1 K 3 Profit S T K 2
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 10.18 Butterfly Spread Using Puts K 1 K 3 Profit S T K 2
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 10.19 Calendar Spread Using Calls Profit S T K
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 10.20 Calendar Spread Using Puts Profit S T K
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 10.21 A Straddle Combination Profit S T K
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 10.22 Profit K S T Profit K S T Strip Strap
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 10.23 A Strangle Combination K 1 K 2 Profit S T
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Derivatives09-2 - Option Analysis and Modeling - FINA222...

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