Basic Black Scholes Option Pricing And Trading

[Note: eBook now available; see Amazon author page for details.] THE AUTHOR: Dr. Crack studied PhD-level option pricing at MIT and Harvard Business School, taught undergrad and MBA option pricing at Indiana University (winning many teaching awards), was an independent consultant to the New York Stock Exchange, worked as an asset management practitioner in London, and has traded options for over 20 years. This unique mix of learning, teaching, consulting, practice, and trading is reflected in every page. This revised 5th edition gives clear explanations of Black-Scholes option pricing theory, and discusses direct applications of the theory to trading. The presentation does not go far beyond basic Black-Scholes for three reasons: First, a novice need not go far beyond Black-Scholes to make money in the options markets; Second, all high-level option pricing theory is simply an extension of Black-Scholes; and Third, there already exist many books that look far beyond Black-Scholes without first laying the firm foundation given here. The trading advice does not go far beyond elementary call and put positions because more complex trades are simply combinations of these. UNIQUE SELLING POINTS -The basic intuition you need to trade options for the first time, or interview for an options job. -Honest advice about trading: there is no simple way to beat the markets, but if you have skill this advice can help make you money, and if you have no skill but still choose to trade, this advice can reduce your losses. -Full immersion treatment of transactions costs (T-costs). -Lessons from trading stated in simple terms. -Stylized facts about the markets (e.g., how to profit from reversals, when are T-costs highest/lowest during the trading day, implications of the market for corporate control, etc.). -How to apply European-style Black-Scholes pricing to the trading of American-style options. -Leverage through margin trading compared to leverage through options, including worked spreadsheet example. -Black-Scholes pricing code for the HP17B, HP19B, and HP12C. -Three downloadable spreadsheets. One allows the user to forecast T-costs for option positions using simple models. Another allows the user to explore option sensitivities including the Greeks. -Practitioner Bloomberg Terminal screenshots to aid learning. -Simple discussion of continuously-compounded returns. -Introduction to "paratrading" (trading stocks side-by-side with options to generate additional profit). -Unique "regrets" treatment of early exercise decisions and trade-offs for American-style calls and puts. -Unique discussion of put-call parity and option pricing. -How to calculate Black-Scholes in your head in 10 seconds (also in Heard on The Street: Quantitative Questions from Wall Street Job Interviews). -Special attention to arithmetic Brownian motion with general pricing formulae and comparisons to Bachelier (1900) and Black-Scholes. -Careful attention to the impact of dividends in analytical American option pricing. -Dimensional analysis and the adequation formula (relating FX call and FX put prices through transformed Black-Scholes formulae). -Intuitive review of risk-neutral pricing/probabilities and how and why these are related to physical pricing/probabilities. -Careful distinction between the early Merton (non-risk-neutral) hedging-type argument and later Cox-Ross/Harrison-Kreps risk-neutral pricing -Simple discussion of Monte-Carlo methods in science and option pricing. -Simple interpretations of the Black-Scholes formula and PDE and implications for trading. -Careful discussion of conditional probabilities as they relate to Black-Scholes. -Intuitive treatment of high-level topics e.g., bond-numeraire interpretation of Black-Scholes (where N(d2) is P(ITM)) versus the stock-numeraire interpretation (where N(d1) is P(ITM)). -Introduction and discussion of the risk-neutral probability that a European-style call or put option is ever in the money during its life.

THE AUTHOR: Dr. Crack studied PhD-level option pricing at MIT and Harvard Business School, taught undergraduate and MBA option pricing at Indiana University (winning many teaching awards), was an independent consultant to the New York Stock Exchange, worked as an asset management practitioner in London, and has traded options for over 15 years. This unique mixture of learning, teaching, consulting, practice, and trading is reflected in every page. SUMMARY OVERVIEW: This revised third edition of Basic Black-Scholes gives extremely clear explanations of Black-Scholes option pricing theory, and discusses direct applications of the theory to option trading. The presentation does not go far beyond basic Black-Scholes for three reasons: First, a novice need not go far beyond Black-Scholes to make money in the options markets; Second, all high-level option pricing theory is simply an extension of Black-Scholes; and Third, there already exist many books that look far beyond Black-Scholes without first laying the firm foundation given here. The trading advice does not go far beyond elementary call and put positions because more complex trades are simply combinations of these. WHAT MAKES THIS BOOK SPECIAL OR UNIQUE?: -It contains the basic intuition you need to trade options for the first time, or interview for an options job. -Honest advice about trading: there is no simple way to beat the markets, but if you have skill this advice can help make you money, and if you have no skill but still choose to trade, this advice can reduce your losses. -Full immersion treatment of transactions costs (T-costs). -Lessons from trading stated in simple terms. -Stylized facts about the markets (e.g., how to profit from reversals, when are T-costs highest/lowest during the trading day, implications of the market for corporate control, etc.). -How to apply (European-style) Black-Scholes pricing to the trading of (American-style) options. -Leverage through margin trading compared to leverage through options. -Black-Scholes option pricing code for the HP17B, HP19B, and HP12C. -Two downloadable spreadsheets. The first allows the user to forecast T-costs for option positions using simple models. The second allows the user to explore option sensitivities including the Greeks. -Practitioner Bloomberg Terminal screenshots to aid learning. -Simple discussion of continuously-compounded returns. -Introduction to "paratrading" (trading stocks side-by-side with options to generate additional profit). -Unique "regrets" treatment of early exercise decisions and trade-offs for American-style calls and puts. -Unique discussion of put-call parity and option pricing. -How to calculate Black-Scholes in your head in 10 seconds (also in Heard on The Street: Quantitative Questions from Wall Street Job Interviews). -Special attention to arithmetic Brownian motion with general pricing formulae and comparisons to Bachelier (1900) and Black-Scholes. -Careful attention to the impact of dividends in analytical American option pricing. -Dimensional analysis and the adequation formula (relating FX call and FX put prices through transformed Black-Scholes formulae). -Intuitive review of risk-neutral pricing/probabilities and how and why these are related to physical pricing/probabilities. -Careful distinction between the early Merton (non-risk-neutral) hedging-type argument and later Cox-Ross/Harrison-Kreps risk-neutral pricing -Simple discussion of Monte-Carlo methods in science and option pricing. -Simple interpretations of the Black-Scholes formula and PDE and implications for trading. -Careful discussion of conditional probabilities as they relate to Black-Scholes. -Intuitive treatment of high-level topics e.g., bond-numeraire interpretation of Black-Scholes (where N(d2) is P*(ITM)) versus the stock-numeraire interpretation (where N(d1) is P**(ITM)).

THE AUTHOR: Dr. Crack studied PhD-level option pricing at MIT and Harvard Business School, taught undergraduate and MBA option pricing at Indiana University (winning many teaching awards), was an independent consultant to the New York Stock Exchange, worked as an asset management practitioner in London, and has traded options for over 15 years. This unique mixture of learning, teaching, consulting, practice, and trading is reflected in every page. SUMMARY OVERVIEW: This revised fourth edition of Basic Black-Scholes gives extremely clear explanations of Black-Scholes option pricing theory, and discusses direct applications of the theory to option trading. The presentation does not go far beyond basic Black-Scholes for three reasons: First, a novice need not go far beyond Black-Scholes to make money in the options markets; Second, all high-level option pricing theory is simply an extension of Black-Scholes; and Third, there already exist many books that look far beyond Black-Scholes without first laying the firm foundation given here. The trading advice does not go far beyond elementary call and put positions because more complex trades are simply combinations of these. WHAT MAKES THIS BOOK SPECIAL OR UNIQUE?: -It contains the basic intuition you need to trade options for the first time, or interview for an options job. -Honest advice about trading: there is no simple way to beat the markets, but if you have skill this advice can help make you money, and if you have no skill but still choose to trade, this advice can reduce your losses. -Full immersion treatment of transactions costs (T-costs). -Lessons from trading stated in simple terms. -Stylized facts about the markets (e.g., how to profit from reversals, when are T-costs highest/lowest during the trading day, implications of the market for corporate control, etc.). -How to apply (European-style) Black-Scholes pricing to the trading of (American-style) options. -Leverage through margin trading compared to leverage through options. -Black-Scholes option pricing code for the HP17B, HP19B, and HP12C. -Two downloadable spreadsheets. The first allows the user to forecast T-costs for option positions using simple models. The second allows the user to explore option sensitivities including the Greeks. -Practitioner Bloomberg Terminal screenshots to aid learning. -Simple discussion of continuously-compounded returns. -Introduction to "paratrading" (trading stocks side-by-side with options to generate additional profit). -Unique "regrets" treatment of early exercise decisions and trade-offs for American-style calls and puts. -Unique discussion of put-call parity and option pricing. -How to calculate Black-Scholes in your head in 10 seconds (also in Heard on The Street: Quantitative Questions from Wall Street Job Interviews). -Special attention to arithmetic Brownian motion with general pricing formulae and comparisons to Bachelier (1900) and Black-Scholes. -Careful attention to the impact of dividends in analytical American option pricing. -Dimensional analysis and the adequation formula (relating FX call and FX put prices through transformed Black-Scholes formulae). -Intuitive review of risk-neutral pricing/probabilities and how and why these are related to physical pricing/probabilities. -Careful distinction between the early Merton (non-risk-neutral) hedging-type argument and later Cox-Ross/Harrison-Kreps risk-neutral pricing -Simple discussion of Monte-Carlo methods in science and option pricing. -Simple interpretations of the Black-Scholes formula and PDE and implications for trading. -Careful discussion of conditional probabilities as they relate to Black-Scholes. -Intuitive treatment of high-level topics e.g., bond-numeraire interpretation of Black-Scholes (where N(d2) is P*(ITM)) versus the stock-numeraire interpretation (where N(d1) is P**(ITM)).

An unprecedented book on option pricing! For the first time, the basics on modern option pricing are explained ``from scratch'' using only minimal mathematics. Market practitioners and students alike will learn how and why the Black-Scholes equation works, and what other new methods have been developed that build on the success of Black-Shcoles. The Cox-Ross-Rubinstein binomial trees are discussed, as well as two recent theories of option pricing: the Derman-Kani theory on implied volatility trees and Mark Rubinstein's implied binomial trees. Black-Scholes and Beyond will not only help the reader gain a solid understanding of the Balck-Scholes formula, but will also bring the reader up to date by detailing current theoretical developments from Wall Street. Furthermore, the author expands upon existing research and adds his own new approaches to modern option pricing theory. Among the topics covered in Black-Scholes and Beyond: detailed discussions of pricing and hedging options; volatility smiles and how to price options ``in the presence of the smile''; complete explanation on pricing barrier options.

Master the essential mathematical tools required for option pricing within the context of a specific, yet fundamental, pricing model.

In Volatility Trading, Sinclair offers you a quantitative model for measuring volatility in order to gain an edge in your everyday option trading endeavors. With an accessible, straightforward approach. He guides traders through the basics of option pricing, volatility measurement, hedging, money management, and trade evaluation. In addition, Sinclair explains the often-overlooked psychological aspects of trading, revealing both how behavioral psychology can create market conditions traders can take advantage of-and how it can lead them astray. Psychological biases, he asserts, are probably the drivers behind most sources of edge available to a volatility trader. Your goal, Sinclair explains, must be clearly defined and easily expressed-if you cannot explain it in one sentence, you probably aren't completely clear about what it is. The same applies to your statistical edge. If you do not know exactly what your edge is, you shouldn't trade. He shows how, in addition to the numerical evaluation of a potential trade, you should be able to identify and evaluate the reason why implied volatility is priced where it is, that is, why an edge exists. This means it is also necessary to be on top of recent news stories, sector trends, and behavioral psychology. Finally, Sinclair underscores why trades need to be sized correctly, which means that each trade is evaluated according to its projected return and risk in the overall context of your goals. As the author concludes, while we also need to pay attention to seemingly mundane things like having good execution software, a comfortable office, and getting enough sleep, it is knowledge that is the ultimate source of edge. So, all else being equal, the trader with the greater knowledge will be the more successful. This book, and its companion CD-ROM, will provide that knowledge. The CD-ROM includes spreadsheets designed to help you forecast volatility and evaluate trades together with simulation engines.

Trading and Pricing Financial Derivatives is an introduction to the world of futures, options, and swaps. Investors who are interested in deepening their knowledge of derivatives of all kinds will find this book to be an invaluable resource. The book is also useful in a very applied course on derivative trading. The authors delve into the history of options pricing; simple strategies of options trading; binomial tree valuation; Black-Scholes option valuation; option sensitivities; risk management and interest rate swaps in this immensely informative yet easy to comprehend work. Using their vast working experience in the financial markets at international investment banks and hedge funds since the late 1990s and teaching derivatives and investment courses at the Master's level, Patrick Boyle and Jesse McDougall put forth their knowledge and expertise in clearly explained concepts. This book does not presuppose advanced mathematical knowledge, though it is presented for completeness for those that may benefit from it, and is designed for a general audience, suitable for beginners through to those with intermediate knowledge of the subject.

The Black–Scholes option pricing model is the first and by far the best-known continuous-time mathematical model used in mathematical finance. Here, it provides a sufficiently complex, yet tractable, testbed for exploring the basic methodology of option pricing. The discussion of extended markets, the careful attention paid to the requirements for admissible trading strategies, the development of pricing formulae for many widely traded instruments and the additional complications offered by multi-stock models will appeal to a wide class of instructors. Students, practitioners and researchers alike will benefit from the book's rigorous, but unfussy, approach to technical issues. It highlights potential pitfalls, gives clear motivation for results and techniques and includes carefully chosen examples and exercises, all of which make it suitable for self-study.