Options 101

A simple glossary

Actualization is a mathematical process which makes possible to relativize financial flows.

Continuously compounded rates are what is to be used in derivatives pricing.

Options Trading explained as for kids .

Option Trading Expressions explained.

What is an option ?

Markets move up and down, and one needs to estimate how high or low is this waving.

The best way to understand how it's done, is to do it !

An asset moves and its volatility is zero ? Can't it be true ?

Closing prices are not enough to grasp intraday volatility. Parkinson number may provide some help.

First Close to close, then Highs and lows. Next both with opening price added !

Is an option expensive or cheap ? Implied volatility tries to answer that question.

Implied volatility derived using standard models isn't the same neither for every strike of a particular maturity. nor for different maturities.

Implied volatility markets sometimes seem to be symmetric.

Implied volatility is neither constant for every strike, nor for every expiry.

Asset simulation is useful to manage position and to price derivatives.

There are different ways to price options. Closed forms, numerical and tree models are amongst them. Monte Carlo is another one.

Parameters like strike, dividend, interest rate and volatility and variables like time and asset provide different impacts on option value.

Option price does not move in a constant way

Delta ∆ is a Greek factor sensitivity measuring a portfolio's first order sensitivity to the value of an underlying.

Rate of change of delta is far from constant.

The gamma of an option is the rate of change of the delta to the underlying.

Implied volatility in the Black & Scholes option pricing model is supposed to be constant. It's far from reality.

It's the sensitivity of an option price to Implied Volatility varaitions.

Theta measures the sensitivity of the value of an option to the passage of time.

Rho ρ measures sensitivity to the riskfree rate

Exchanges all around the world where derivatives are traded. Website links, delayed quotes and settlement prices.