Vanilla Options  Mechanics, Analysis and Strategies
Duration: 2 days
 Options Markets and Instruments
 Nonlinearity of Option Payoff Profiles
 Understanding Volatility’s Role in Option Pricing
 Analytical Option Pricing
 Numerical Option Pricing
 “Greeks” and other Risk Analytics
 Trading and Hedging with Options
The objective of this seminar is to give you a thorough introduction to financial options and a
good understanding of their mechanics, pricing and applications.
We start with general introduction to options and option markets. We present the basic options
structures, we explain the basic option terminology, and we explain how options are traded and
settled on options exchanges and in the OTC market.
We then explain the basic principles of option pricing. After a brief review of probability theory
and an overview of fundamental statistical measures, we explain and demonstrate in more detail how
options are priced. We first look at the payoff profiles of different option types, and we explain
the socalled putcall parity and other important relationships between options prices. Further, we
describe the role of volatility in option pricing, we discuss what lies behind the term structure
of volatility, and we explain techniques for volatility forecasting.
A number of important valuation models will then be presented and demonstrated, including the
BlackScholes, Black, GarmanKohlhagen, CoxRossRubinstein and BlackDermanToy (BDT) models. We
illustrate the use of these models with many practical examples.
Further, we explain how the important risk measures such as delta, gamma, vega, rho, theta etc. are
derived from option pricing models and how these key ratios should be properly interpreted. We will
make sure that you fully appreciate the importance of these sensitivities in trading and hedging.
We present and discuss a number of trading strategies with options. Such strategies include “open
position” strategies, “spread” strategies, “bull” and “bear” strategies, and different volatility
strategies with options. The strategies will be illustrated in depth using reallife data and
computer simulations.
We then explain how options can be effectively used to hedge interest rate, FX, equity, commodity
and energy risk. We give examples of simple 1:1 hedges, but also more complex portfolio hedging and
ratio hedging strategies will be examined in full detail. Finally, we explain deltahedging and
risk transferring through structured products.
Day One
09.00  09.15 Welcome and Introduction
09.15  12.00 Introduction to Option Markets and Instruments
 Option Definitions and Mechanics
 Types of Options and their PayOffs
 How Options are Traded
 Option Glossary – the Language of the Market
 Overview of Option Applications
Option Pricing and Risk Assessment

Closer Look at Option PayOff Profiles
 Value Diagrams
 P&L Diagrams

Pricing Basics
 Minimum Option Value
 The Put/Call Parity
 "Intrinsic" and "Time Value"

Important Statistics in Option Pricing
 Probability Distributions and Volatility
 The BlackScholes/Black Models
 The GarmanKohlhagen Model (Currency Options)
 Option Price Sensitivities ("Greeks")
 Computer Simulations and Exercises
12.00  13.00 Lunch
13.00  16.30 Option Pricing and Risk Assessment (Continued)
 Introduction to Numerical Option Pricing
 "Risk Neutral" Pricing

Numerical Model for Pricing of Stock Options (CoxRossRubinstein)
 Modelling the Behaviour of Stock Prices
 Setting up the Payoff Tree
 Calculating Option PayOffs
 Valuing European and American Call and Put options
 Calculating the "Greeks" in the CRR Model
 Valuing Currency Options Using the CRR Model

Numerical Models for Valuing Interest Rate Options
 The Vasicek Model
 The BDT Model
 The HullWhite (Extended Vasicek) Model
 Computer Simulations
 Exercises
Day Two
09.00  09.15 Brief recap
09.15  12.00 Trading with Options

The Trading Process
 Formulating Expectations
 Establishing a Risk Profile
 Search and Selection of Strategies

Bull strategies
 Long Call, Short Put, Bull Spread, Long Synthetic Future, Long SemiFuture

Bear strategies
 Long Put, Short Call, Bear Spread, Short Synthetic Future, Short SemiFuture

Volatility Strategies
 Straddles and Strangles
 Butterflies and Condors
 Workshop: Design Butterfly
 Workshop: "Twin Peaks"

Spread Trading
 IntraMarket and InterMarket Spreads
 Calendar Spreads
 Followup Strategies
 Computer Simulations and Exercises
12.00  13.00 Lunch
13.00  16.30 Hedging with Options
 The Hedging Process

Single Position "OnetoOne" Hedge
 "Protective Put"
 "Covered Call"

Portfolio Hedging
 Hedging a Portfolio of Stocks
 Hedging a Portfolio of Bonds
 Hedging a Currency Position
 Hedging Uncertain and Contingent Cash flows
 Dynamic Hedging Strategies

Hedging of Marketmaker Positions in Options
 DeltaHedging of Options Positions
 Hedging of Gamma and Vega Risks
 The Problem with Fat Tails
 Exercises
Evaluation and Termination of the Seminar
