## Options Math for Traders: How to Pick the Best Option Strategies for Your Market Outlook | by Scott Nations | ISBN: 9781118164372 | Option Pricing Models and Implied Volatility. Calendar Spreads. Vertical Spreads.

**by Scott Nations
2012
ISBN: 9781118164372**

Most independent traders have an imperfect understanding of the math behind options pricing. With this practical resource as your guide, you’ll gain valuable lessons in this area and discover how this information can improve your trading performance.

[mp-amz keywords=”1118164377″]

**Table of Contents**

Options Math for Traders—How to Pick the Best Option Strategies for Your Market Outlook

Preface

OVERVIEW

THE PHENOMENA

THE GOAL

THE STRATEGIES

THE TAKEAWAYS

JUST ONE EQUATION

ABOUT THE WEBSITE

GETTING STARTED IN OPTION TRADING

Part One – The Basics

Chapter 1 – The Basics

OVERVIEW

OPTION SPECIFICS

DESCRIBING AN OPTION

OPTION COST AND VALUE

HOW TIME VALUE CHANGES

DOING THE SAME FOR PUTS

MONEYNESS

Chapter 2 – Direction, Magnitude, and Time

OVERVIEW

MAGNITUDE AND TIME ARE RELATED

UP AND DOWN AREN’T THE ONLY POSSIBILITIES

THE PATH MATTERS

VOLATILITY COMBINES THESE ISSUES

Chapter 3 – Volatility

OVERVIEW

RISK IS VOLATILITY

INVESTORS DEMAND A RISK PREMIUM, REDUCING THE PRICE OF RISKY ASSETS

VOLATILITY IS THE STANDARD DEVIATION OF RETURNS

STANDARD DEVIATION TELLS US WHAT RANGE OF OUTCOMES TO EXPECT

STANDARD DEVIATION OF RETURNS IS VOLATILITY

TYPES OF VOLATILITY

Chapter 4 – Option Pricing Models and Implied Volatility

OVERVIEW

IT’S AN OPTION PRICING MODEL, NOT AN EQUATION FOR OPTION VALUES

A BLACK-SCHOLES EXAMPLE

THE ASSUMPTIONS

INPUTS TO THE BLACK-SCHOLES OPTION PRICING MODEL

IMPLIED VOLATILITY

THE SENSITIVITY OF OPTION PRICES TO CHANGES IN THE INPUTS

Part Two – Applications and Results

Chapter 5 – The Volatility Risk Premium

OVERVIEW

VOLATILITY RISK PREMIUM, THE WHAT

THE ASSUMPTIONS, THE WHY OF THE VOLATILITY RISK PREMIUM

THE VOLATILITY RISK PREMIUM—HOW MUCH

HOW TO THINK ABOUT THE VOLATILITY RISK PREMIUM

THE VOLATILITY RISK PREMIUM BY ASSET CLASS

THE VOLATILITY RISK PREMIUM OVER TIME

Chapter 6 – Implied Volatility and Skew

OVERVIEW

IMPLIED VOLATILITY BY STRIKE PRICE

OPTION SKEW, THE WHEN

OPTION SKEW, THE WHERE

ASSUMPTIONS, THE FIRST WHY OF OPTION SKEW

ASSUMPTIONS AND OTHER REASONS

DETERMINING IF ONE OPTION IS A GOOD HEDGE FOR ANOTHER OPTION

SKEW, THE HOW MUCH

Chapter 7 – Time Value and Decay

OVERVIEW

TIME VALUE BY STRIKE PRICE

THETA—THE MEASURE OF DAILY OPTION TIME VALUE EROSION

OPTION PRICE EROSION DOESN’T HAPPEN IN A STRAIGHT LINE

OPTION PRICE EROSION, THE WHAT

ANOTHER WAY OF LOOKING AT DAILY EROSION

Chapter 8 – The Bid/Ask Spread

OVERVIEW

WHAT DO WE MEAN BY “THE MARKET”?

MARKET MAKERS

BID/ASK SPREAD, THE WHAT

DELTA’S IMPACT ON BID/ASK SPREADS

WIDER BID/ASK SPREADS

THE BID/ASK SPREAD WHEN THERE’S MORE COMPETITION

EQUITY OPTIONS

THE BID/ASK FOR OPTION SPREADS

THE BID/ASK OF MULTI-LEGGED SPREADS

WHAT’S THE REAL FAIR VALUE OF AN OPTION BASED ON THE BID/ASK?

Chapter 9 – Volatility Slope

OVERVIEW

THE CORRELATION BETWEEN MARKET PRICES AND IMPLIED VOLATILITY

THE VOLATILITY SLOPE, THE WHY

THE ASYMMETRY

VOLATILITY SLOPE AND SKEW ARE RELATED

Part Three – The Trades

Chapter 10 – Covered Calls

OVERVIEW

COVERED CALLS ARE BEST FOR STOCKS YOU ALREADY OWN AND WANT TO KEEP

THE PHENOMENA AND COVERED CALLS

BREAKEVEN POINTS

BREAKEVEN POINTS AND RATES OF RETURN

USING COVERED CALLS FOR DOWNSIDE PROTECTION

IF OUR STOCK RALLIES

SELECTING THE COVERED CALL

COVERED CALLS AND DAILY PRICE EROSION

COVERED CALLS AND THE VOLATILITY RISK PREMIUM

PLACING YOUR COVERED CALL ORDER

FOLLOW-UP ACTION

GETTING ASSIGNED

ROLLING

Chapter 11 – Selling Puts

OVERVIEW

SELLING PUTS IS BEST FOR STOCKS YOU WANT TO OWN AT A DISCOUNT

THE PHENOMENA

SELLING PUTS IS IDENTICAL TO A BUYWRITE

SELLING PUTS TO BUY STOCK AT A DISCOUNT

ROLLING

Chapter 12 – Calendar Spreads

OVERVIEW

MAXIMUM PROFIT AND LOSS

THE PHENOMENA

LONG CALENDAR SPREADS AND IMPLIED VOLATILITY

CALENDAR SPREAD PAYOFF AT FRONT-MONTH EXPIRATION

NEUTRAL, BULLISH, AND BEARISH CALENDAR SPREADS

CALENDAR SPREAD PROFITABILITY WITHOUT MOVEMENT

CALENDAR SPREAD SENSITIVITIES

FOLLOW-UP

BULLISH BECOMES BEARISH…

CATALYSTS

Chapter 13 – Risk Reversal

OVERVIEW

A RISK REVERSAL AND SKEW

WHEN TO USE A RISK REVERSAL

USING A RISK REVERSAL

RISK REVERSALS PRIOR TO EXPIRATION

WHEN A RISK REVERSAL DOESN’T WORK

RISK REVERSALS AND LONGER-DATED EXPIRATIONS

FOLLOW-UP ACTION

Chapter 14 – Vertical Spreads

OVERVIEW

BREAKEVENS

SKEW AND VERTICAL SPREADS

VERTICAL SPREAD RISK AND REWARD

LONG PUT SPREADS AND SHORT CALLS SPREADS ARE ALIKE

LONG PUT SPREADS AND SHORT CALL SPREADS ARE DIFFERENT

THE WIDTH OF THE SPREAD VERSUS THE COST

THE GREEKS

IMPLIED VOLATILITY AND THE COST OF VERTICAL SPREADS

VERTICAL SPREADS—HOW AGGRESSIVE?

CALL SPREADS, SKEW, AND THE PROBLEM OF THE “TROUGH”

FOLLOW-UP ACTION

Appendix

STANDARD DEVIATION

REALIZED VOLATILITY

VOLATILITY FOR DIFFERENT TIME PERIODS

THE BLACK-SCHOLES FORMULA EXTENDED, PUTS AND THE GREEKS

LINEAR INTERPOLATION

ANNUALIZING YIELD

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