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Visual Quantitative Finance: A New Look at Option Pricing, Risk Management, and Structured Securities

by Michael Lovelady

April 2013

Beginner

336 pages

6h 40m

English

Pearson

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Growth in Structured SecuritiesGrowing Emphasis on Low Volatility and DividendsCriticisms of Structured SecuritiesDemand for Quantitative SkillsDirection of Quantitative FinanceWhen I Realized It Might Be EasierTry AgainThe SpreadsheetVisualizing the ResultWhat It Means and Why It Works: A Nontechnical OverviewIt Doesn’t Get Too ComplicatedAn Integrated View of Risk ManagementEndnotes
Random VariablesBuilding the SpreadsheetCorrecting the MistakeOptional: Additional Resources
The Black-Scholes FormulaBlack-Scholes AssumptionsThe Binomial Option Pricing MethodMonte Carlo MethodsPutting Visual Quant in ContextAdditional Reading, Advanced Topics, and ResourcesEndnotes
How Likely Is Something?Value-at-RiskMultiple Stock VaRStock and Option VaRConditional Value-at-Risk

Adding Functionality to the ModelStock Return Mean (Cell G3)Stock Return Standard Deviation (Cell G4)Discount FactorStock Price MedianSummary of New FormulasPricing Put OptionsEffects of Assumption ChangesEndnote
Definition of the Lognormal DistributionThe Forward EquationCross Reference: Stochastic Differential EquationsThe Backward EquationThe Calc EngineAssigning ProbabilitiesSetting the Stock Price RangeVisualizing Option Pricing As Normal or Lognormal
What Is a Synthetic Annuity, and How Does It Work?The Investment ProfileAssigning Probabilities Using Implied VolatilityUsing Options to Reshape the Investment ProfileAdjusting the Profile for Behavioral FinanceConcentrated Stock ExampleThe Synthetic Annuity in Turbulent Markets
The Purpose and Context of the ModelThe Stock-Only Investment ProfileThe Calc EngineThe Stock-Only Profit CalculationAdding the ChartTest: Stock-Only Investment Profile
Long Put ProfitShort PutExpected ValuesBlack-Scholes Add-InThe Heading FormulasDelta FormulasTime Value and Total Premium Formulas
Long Call Option Investment ProfileShort Call OptionLong Put OptionShort Put Option
Covered Call Investment ProfilePut–Call ParityIron Condor Investment ProfileSynthetic Annuity (SynA) Investment ProfileAdding a Customized Utility FunctionEndnotes
Investing in XYZAttribution: Explaining Why the Option Price ChangedEndnote
The Option GreeksCalculating Greeks: Formulas, Models, and PlatformsDeltaThetaVega
Tracking TemplateTradeStation PlatformPutting It All Together: Synthetic Annuity Overview
Covered Synthetic Annuity (CSynA)Example: Deere & CompanyThe Standard CSynASupplemental Material: The CBOE S&P 500 BuyWrite IndexBXM Study by Callan Associates

Content preview from Visual Quantitative Finance: A New Look at Option Pricing, Risk Management, and Structured Securities

12. Understanding Price Changes

Option prices are in constant movement. So are the values of structured securities that contain options. This chapter looks at the components of option value and the factors that drive changes in those values. The chapter begins with a hypothetical investment, explains the role of implied volatility in constructing an investment profile, and then tracks option prices in terms of intrinsic value, time value, and the elements of extrinsic value. The Greeks are covered in more detail in the next chapter.

Investing in XYZ

Imagine you are watching CNBC’s Mad Money. Jim Cramer just interviewed the CEO of Company XYZ. You already know the company and like what you heard in the interview. You think now is a good time ...

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ISBN: 9780132929233Purchase book