Table of Contents

1 Option

1.1 definition

  • call: right to purchase stocks at strike price.
  • put: right to sell stocks at strike price.

1.2 Option premium:

  • premium = intrinsic value + time value
    1. Intrinsic value in options is the in-the-money portion of the option's premium. For example, if a call options strike price is $15 and the underlying stock's market price is at $25, then the intrinsic value of the call option is $10, or $25 - $15.
    2. Value of a call option: max[(S-K),0].
    3. Value of a put option: max[(K-S),0].
    4. the time value (TV) (extrinsic or instrumental value) of an option is the premium a rational investor would pay over its current exercise value (intrinsic value), based on the probability it will increase in value before expiry.

1.3 Black Scholes vs Monte Carlo vs Binomial tree

  1. Black Scholes:

    Known input factors such as time to expiration, volatility, interest rate, current stock price, strike price, dividend yield. It's based on risk neutral process under some reasonable assumptions.

    • The underlying stock price follows a geometric Brownian motion.
    • The model is based on a normal distribution of underlying asset returns.
    • The option is European and can only be exercised at expiration.
    • No dividends are paid out during the life of the option.
    • Efficient markets (i.e., market movements cannot be predicted).
    • There are no transaction costs in buying the option.
    • The risk-free rate and volatility of the underlying are known and constant.
    • Advantages & Limitations
      • Advantage: The main advantage of the Black-Scholes model is speed – it lets you calculate a very large number of option prices in a very short time.
      • Limitation: The Black-Scholes model has one major limitation: it cannot be used to accurately price options with an American-style exercise as it only calculates the option price at one point in time – at expiration. It does not consider the steps along the way where there could be the possibility of early exercise of an American option.
  2. Monte Carlo and binomial tree use numerical simulation procedures.
    • Advantages & Limitations
      • Advantage: The big advantage the binomial model has over the Black-Scholes model is that it can be used to accurately price American options.
      • Limitation: The main limitation of the binomial model is its relatively slow speed.

1.4 Greeks

  1. delta

    Option value change respected to the stock price change.

  2. gamma

    Option delta change respected to the stock price change.

  3. theta

    Option value change respected to the time to expiration.

  4. rho

    Option value change respected to the interest rate change.

  5. vega

    Option value change respected to the volatility change.

1.5 Market microstructure and products

1.6 Basics of vanilla option risk

1.7 Risks of exotic options

1.8 Option theory

2 Future

*基差=现货价格-期货价格

*基差的不确定性被称为基差风险，降低基差风险实现套期保值关键是选择匹配度高的对冲期货合约。基差风险与对冲平仓时的基差直接相关，当投资者持有现货，持有期货短头寸对冲，对冲平仓日基差扩大，投资者将盈利；相反，当投资者未来将买入某项资产，持有期货长头寸对冲，对冲平仓日基差扩大，投资者将亏损。

*基差有时为正（此时称为反向市场），有时为负（此时称为正向市场），因此，基差是期货价格与现货价格之间实际运行变化的动态指标。 反向市场（又称逆向市场Inverted Market或现货溢价Backwardation）是指在特殊情况下，现货价格高于期货价格（或者近期月份合约价格高于远期月份合约价格），基差为正值。 出现这种情况有两个原因：一个对某种商品的需求非常迫切，远大于产量及库存量；二是预计将来该商品的供给会大幅度增加。 正向市场也叫正常市场，即在正常情况下，期货价格高于实货价格（或者合约价格低于远期月份合约价格），基差为负值。 正向市场分为两种情况，一是期货价格高于现货价格，二是远期合约价格高于近期合约价格。因为期货市场多了未来的持有成本，理论上期货价格应该高于现货价格，远期合约的价格也相应高于近期合约的价格。正向市场是套期保值交易的理想环境。

*套期保值指在期货市场上买入（或卖出）与现货市场交易方向相反、数量相等的同种商品的期货合约，进而无论现货供应市场价格怎样波动，最终都能取得在一个市场上亏损的同时在另一个市场盈利的结果，并且亏损额与盈利额大致相等，从而达到规避风险的目的。