This course provides participants with a comprehensive and detailed analysis of vanilla and exotic options  – pricing, risk characteristics, and their dynamic behaviour in the context of the management of a portfolio – a combination of proprietary risk strategies combined with flow trading and market making responsibilities. The primary focus of the programme is to examine the dynamic risk characteristics of options from a trader/client perspective. Particular emphasis is placed on gaining an understanding of the dynamic interaction between option price determinants, the impact on portfolio risk of higher order non-linearities of vanilla and exotic options and the implications for their management.

The programme finally focuses on exotic options, and provides a similar perspective on their pricing and risk characteristics, in order to understand the motivations and rationale for their usage in a variety of different hedging and trading applications.

Attend this intensive and highly practical 3–day training course and learn the best practice techniques to:

• Analyse vanilla and exotic options
• Build option pricing and valuation models
• Gain practical experience of option risks and dynamic hedging
• Use options to express trading views
• Gain an understanding of how options can be used in directional and non-directional strategies
• Understand different hedging and trading applications

PLUS: Enhance your practical skills with computer-based simulations and workshop case studies on option pricing, heading and risk management

Methodology
The training consists of classroom-based teaching combined with computer-based simulations and exercises, using a range of spreadsheet-based software. Delegates will be given appropriate reading material prior to attendance at the course.

Simulation Software
Delegates will each receive copies of all option pricing and simulation software for their own use after the programme

Who Should Attend?

This course has been specifically designed for the benefit of:

      ·         Traders and dealers
      ·         Derivatives sales personnel
      ·         Structurers
      ·         Risk managers and risk controllers
      ·         Audit managers
      ·         Corporate account officers
      ·         Asset managers
      ·         Corporate treasury personnel

The course assumes a general understanding of 'vanilla' derivative instruments and, whilst not based upon a detailed theoretical or mathematical approach, does require basic mathematical fluency.

Day 1

Registration commences at 8:30 on day one
Programme runs from 9:00 - 5:00 daily

Option valuation - principles and option pricing models

• Continuous stochastic processes; Brownian motion
• The Black-Scholes option pricing model
• Underlying concepts, assumptions and derivation of the Black- Scholes pricing model
• Option price determinants (strike, underlying price, volatility, term, interest rate, dividend)
• Black (1976) formula for options on forwards
• Advantages and shortcomings of the Black-Scholes framework
• Rationalising distortions to the Black-Scholes model framework
                          Non-continuous hedging
                          Stochastic volatility
                          Skewness and Kurtosis
                          Change in Greeks resulting from large moves in underlying
  
   
• Numerical methods: Binomial lattice models
• Arbitrage-free derivation of a generalized binomial model
• Modelling spot and forward processes
• American and other path dependent options
• Volatility and time parameters in the binomial model; value determinants, price sensitivities
• Simulation methods of option valuation - Monte Carlo

Case study: building option pricing models; valuation of European, American option styles

Volatility

• Understanding volatility; the role of volatility in option pricing; volatility as an ‘asset class’
• Historic, implied and realised volatility measures
• Volatility estimation: analysis of data samples; sample sizes; weighting sample data
• Volatility surfaces

                       Volatility smiles, skews
                       Volatility term structure effects

• Volatility properties

                         Stochastic volatility
                         Mean reversion

• Stochastic volatility models

                        Heston stochastic volatility model

• Volatility analysis

                         Volatility relative value analysis (implied vs. realised)
                         Skew interpretation and analysis

• Volatility trading strategies

Option risks; hedging and risk management of option positions

• First order price risks: delta, vega, theta, rho, phi
• Delta hedging and risk analysis

                        Dynamic risk management using delta
                        Delta hedging an option portfolio
                        Limitations and risks inherent in delta hedging
                                   PIN risk
                                   ‘Sticky strike’ effects
                                    Expiration effects
                                    Liquidity effects
                                   Execution risk (risk vs. agency execution)

• Gamma; 2nd order option price sensitivity

                         Interpreting gamma
                         Gamma characteristics of in-, at- and out-of-the-money options
                         Long and short gamma – risks and opportunity
                         Impact of gamma on delta hedge management
                         Implied vs. realised volatility exposure
                         Maximising profitability from gamma management

• Theta; option price time decay

                         Theta as cost of carry
                         Inter-relationship between Theta, Gamma

• Vega; implied volatility risk sensitivity
• Rho; Interest rate sensitivity
• Understanding and actively managing inter-relationships between option price sensitivities
• Active management of portfolio delta, gamma and vega risks
• Higher order risks

                         Delta time decay (Charm)
                         Gamma sensitivity (Speed, Colour)
                         Vega (Vanna, Vomma)
                         Rega and Sega risks

• Skew risk (Rega)

                        Risk reversals
      ·         Limitations of option ‘Greeks’
                         Discontinuities in market price behaviour
                         Expiration trading
                         Strategies for managing risk when ‘Greeks’ experience large, discrete changes
                         Stress testing and portfolio scenario analysis; identifying potential future risks

Case study: dynamic management of option risks in a single option position/portfolio context; Delta hedging and the analysis of trading P/L over a trading horizon. Exercise will involve managing position gamma in order to attempt to maximise profitability

 

Day 2

Option strategies

• Directional (Delta) and non-directional (volatility/time decay) strategies

                      Bullish, bearish directional strategies
                                   High/low volatility
                                    Risk/reward (limited vs. unlimited risk strategies)
                       Bullish, bearish volatility strategies
                                   Risk/reward (limited vs. unlimited risk strategies)
 

• Directional trading and arbitrage strategies

                         Put-Call parity
                         Conversions and reversalse
                         Synthetic forwards and options
                         Combinations
                         Synthetic lending/borrowing
                         American options; assignment risk
 

• Vertical Spreads

                         Call and put (Bull and Bear) spreads
                         Trading Rationale
                         Pricing; impact of skew effects
                         Risk characteristics
                                     Delta hedging
                                     Gamma; risk reversal
                                     Skew risk

• Non-directional (volatility/time decay) trading strategies
• Calendar Spreads

                        Rationale
                         Volatility term structure (calendar skew) impact
                         Sensitivities; volatility/time decay exposure

• Straddles, strangles and butterfly spreads

                         Structure and rationale
                         Risk characteristics
                         Skew effects
                         Volatility trading; dynamic management

• Client trading and hedging strategies
• Risk reduction strategies

                        Puts, collars
                        Put spreads

• Yield enhancement strategies

                        Over and under-writing strategies

• Volatility and correlation trading strategies

                         Straddles
                         Dispersion trading strategies

Case study: structuring option strategies (spreads, collars, butterflies); examination of risk characteristics
and position risk management through time

Interest rate options
 

• Interest rate caps and floors
•  Swap options
•  Hybrids: collars; corridors
•  Pricing and hedging caps and floors
•  Interest rate option pricing models
•  Risk management

                         Delta hedging caps and floors
                        Gamma and Vega management; risk bucketing

• Practical applications of interest rate options

•  Asset and liability risk management
•  Embedded caps and floors; capped FRNs, Minimax FRNs, Reverse FRNs
•  European, Bermudan callable and puttable swaps

Case study: corporate interest rate exposure management with options

FX options

• Fundamental properties of currency options
• Market conventions, terminology, price quotation basis (base vs. quoted)
• Pricing Vanilla FX options – Garman-Kohlhagen model
• Volatility surfaces for FX options
• Derivative Instruments and Markets, Portfolio

Equity options

• European and American styles
• Single stock and index options
• Basket (index) options

                        Correlation impact on valuation
                        Implied vs. realised correlation

Commodity options
 

• Pricing models for commodities

•  Backwardation effects and hedging considerations
•  Mean reversion effect

Day 3

New generation products

• Volatility and variance swaps

                         Mechanics of variance swaps
                         Pricing and hedging

• Uses and applications of variance swaps

                        Volatility trading
                        Dispersion trading

Exotic options
 

• Exotic option classification
•  Pay-off structure
•  Motivations and applications of exotic options
•  Pricing and valuation issues
•  Black-Scholes, analytical models; advantages and shortcomings
•  Numerical methods (Binomial, Trinomial lattice models, Monte Carlo simulation)
•  Modelling considerations for exotic option payoffs
•  Skew effects

Barrier options

• Pricing and valuation issues

•  Risk management of barrier option risks; risk reversals
•  Application of barrier options in trading and hedging strategies
•  Embedded barrier options in equity structured products (e.g. bonus certificates, reverse CBs)

Case study: barrier option hedging strategies: forward plus, knock-in collars, knock-out forwards

Average rate (Asian) options
 

• Mechanics of average rate options
•  Pricing and risk management characteristics
•  Currency hedging with Asian options

Digital (binary) options
 

• Pricing of digital options
•  Risk management of digital options; replication and hedging
•  Applications: range accrual notes, contingent premium options

Rainbow (multi-asset) options
 

• Basket, rainbow, quanto options

•  Impact of basket parameters (volatility, correlation) on pricing
•  Risk management
•  Delta matrices; correlation risks
•  Applications – trading strategies; structured products

Case study: structuring, pricing and risk management of equity, linked structured products

 

• Graham Dudlyke

  Graham Dudlyke is a highly experienced derivatives consultant who has held senior positions in a number of major financial institutions in London and New York. As Vice President of the Arbitrage Trading Group at Chemical Bank, Graham was responsible for management and marketing of interest rate option trading, managing a portfolio of interest rate caps, floors and swap options. As an Associate Director of Mitsubishi Finance, London, he gained considerable experience in trading portfolios of swaps and options, and in risk management and financial engineering, including structuring new issues of debt and creating structured assets.
  
  As Manager of SE Banken's Global Derivatives Trading Group, he held overall responsibility for swaps, options and fixed income portfolio trading and risk management, new product development, and corporate and institutional marketing of structured debt products. Graham lectures internationally on all aspects of derivatives and fixed income and is highly respected for his practical market approach to product structuring and applications. Graham holds an MBA from Imperial College, London and an MA in Chemistry from Oxford University.

  Courses run by this instructor

  • Equity Structured Products
  • OTC Derivatives Markets and the Regulatory Reform

Options Workshop

Interested in holding this course in-house? Please fill out your details and a member of our team will be in touch with more information.

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