Option Trading: Pricing and Volatility Strategies and Techniques

321 Pages·2010·4.75 MB·English

by  Euan Sinclair

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Option
Trading
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Option
Trading
Pricing and Volatility
Strategies and Techniques
EUAN SINCLAIR
JohnWiley&Sons,Inc.
iii
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Copyright(cid:1)C 2010byEuanSinclair.Allrightsreserved.
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LibraryofCongressCataloging-in-PublicationData:
Sinclair,Euan,1969-
Optiontrading:pricingandvolatilitystrategiesandtechniques/EuanSinclair.
p. cm.–(Wileytradingseries)
Includesindex.
ISBN978-0-470-49710-4(cloth)
1. Options(Finance) 2. Pricing–Mathematicalmodels. I. Title.
HG6024.A3S56222010
332.63’2283–dc22 2010003139
PrintedintheUnitedStatesofAmerica
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Tomyparents
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Contents
Preface xi
ProfessionalTrading xii
TheRoleofMathematics xiv
TheStructureofthisBook xvi
Acknowledgments xix
CHAPTER 1 History 1
Summary 6
CHAPTER 2 Introduction to Options 7
Options 9
SpecificationsforanOptionContract 9
UsesofOptions 11
MarketStructure 14
Summary 20
CHAPTER 3 Arbitrage Bounds for Option Prices 21
AmericanOptionsComparedtoEuropeanOptions 25
AbsoluteMaximumandMinimumValues 25
Summary 39
CHAPTER 4 Pricing Models 41
GeneralModelingPrinciples 42
ChoiceofDependentVariables 45
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viii CONTENTS
TheBinomialModel 48
TheBlack-Scholes-Merton(BSM)Model 55
Summary 61
CHAPTER 5 The Solution of the
Black-Scholes-Merton
(BSM) Equation 63
Delta 67
Gamma 72
Theta 76
Vega 80
Summary 88
CHAPTER 6 Option Strategies 89
ForecastingandStrategySelection 89
TheStrategies 93
Summary 116
CHAPTER 7 Volatility Estimation 117
DefiningandMeasuringVolatility 119
ForecastingVolatility 129
VolatilityinContext 132
Summary 136
CHAPTER 8 Implied Volatility 137
TheImpliedVolatilityCurve 138
ParameterizingandMeasuringtheImplied
VolatilityCurve 142
TheImpliedVolatilityCurveasaFunction
ofExpiration 145
ImpliedVolatilityDynamics 146
Summary 151