Understanding & Using Options

Course Overview

The aim of the course is to give delegates a good understanding of the option markets and to look into the Pricing and Trading of options. 

Furthermore they will be able to use options and to structure solutions for themselves, corporate customers and investors.

By the end of the course delegates will:

• Understand the mechanics of option pricing and valuation
• Design trading strategies using a combination of options
• Apply and use bond options, caps, floors and swaptions
• Gain an exposure and understanding of the Greeks
• Comprehend the risks and rewards of the options market, understand volatility and maximise trading opportunities
• Understand Black-Scholes
• Learn techniques to build and price sophisticated structured  products

Methodology:

Participants of the course will interactively take part in the exercises by pricing and trading options on laptops.  A spreadsheet-based program will be used to support exercises. Course segments will involve exercises designed to apply concepts discussed in the instruction.

Course Content

Day One

Options: the fundamentals

• Definition, conventions and terminology:
  • price,
  • quote &
  • settlement
• Puts and calls and what they mean
• American, European and Bermudian options
• Intrinsic and time value
• Understanding at, in, and out of the money options

Basic Option strategies

• Call and put spreads
• Collars
• Calendar spreads
• Straddles and Strangles
• Box spreads
• Other applicable strategies
• Put and call parity

Case Studies: Delegates will work on using a variety option combinations

Risk Management – Understanding the Greeks and their interaction

• Delta
• Gamma
• Decay
• Vega
• Rho
• Delta Hedging
• Trading a book and seeking Gamma

Case Studies: Delegates will establish a portfolio in Excel and its profit, loss and decay will be monitored as variables change

Day Two

Volatility

• Volatility concept and impact on pricing
• Term structure
• Smile (straddles, risk reversals and butterflies)
• Forward volatility
• Historical – Implied – Actual
• Hedging and trading an options book
• Volatility surfaces
• Other mark to market issues

Interest rate options

• Caps
• Floors
• Collars
• Swaptions
• Bond options

Case Studies: Comparing caps, swaps and collars to hedge interest rate risks

Option Pricing Tools

• Basic Probability
• Normal Distributions
• Lognormal Distributions
• Mean Variance Analysis of Asset Returns
• Understanding The Black-Scholes equation
• Problems with Black-Scholes
• Kurtosis

Case Studies: Demonstration of pricing and the Greeks in Excel

Day Three

More complex options

• Digitals: European options
• Accrual options
• Asian options:
  • average rate,
  • average strike,
  • one touch no touch,
  • single & double
• Barrier options:
  • European &  American
  • single & double
  • knock-in & knock-out
• Discrete & window options
• Binary options
• Basket options

Case Studies: Delegates will work on using digital, barrier and Asian options for hedging currency risk, how can range accrual and basket options enhance yield for MTNs

Exotic Options and their pricing features

• Basket options
• Quanto options
• Pricing using Binomial trees
• GARCH methods
• Stochastic volatility models

Structuring Bonds and MTNs using options

• Equity Linked Transactions
• Convertibles
• FX linked notes
• Credit Linked Notes (CLNs) with an option element

Case Studies: A variety of Structured Products will be dissected

Delivering this course in-house for you to a number of participants could be very cost effective. Please call us on 020 7387 4484 to discuss this further.

If you have any questions about this seminar please write to us at post@redcliffetraining.co.uk.