Black-Scholes Made Easy is the fastest and easiest way to learn about options. The tutorial teaches you all about options, how to run the demonstrations, and how to do the analysis. To go to implied volatility calculator, click here.
Black-Scholes Made Easy is the fastest and easiest way to learn about options. The tutorial teaches you all about options, how to run the demonstrations, and how to do the analysis. To go to implied volatility calculator, click here.
Black-Scholes Made Easy is the fastest and easiest way to learn about options. The tutorial teaches you all about options, how to run the demonstrations, and how to do the analysis. To go to implied volatility calculator, click here.
by Jerry Marlow The fastest and easiest way to learn about stock options, option prices, stock-market volatility, and Black- Scholes options pricing theory. Scroll down. Take a look at the demonstrations, simulations, and analyses you can run with Black-Scholes Made Easy. The tutorial teaches you all about options, how to run the demonstrations, how to run the simulations, and how to do the analysis. To find out how you can learn all about options the fast, easy way with Black-Scholes Made Easy, click here. To go to implied volatility calculator, click here. Stock prices are volatile If your browser is Internet Explorer, to give yourself more viewing room, hit the F11 key on your keyboard. Volatility means that a stock's future price path is uncertain The more volatile a stock, the more uncertain its future value An option can make you a ton of money or you can lose it all A forecast for a stock is a bell-shaped curve You can translate your estimate of possible future prices into a forecast You are 99.7% certain the outcome will be within the curve One chance in ten that price will be in any given decile You can translate a forecast into potential price paths Monte Carlo simulations show relationship between paths and forecast From stock’ s historical returns, calculate historical standard deviation Continuously compounded returns are normally distributed Stock-price changes are lognormally distributed Price paths are characterized by geometric Brownian motion Volatility is constant over the investment horizon May not be your customary way of thinking Lose all your money, rate of return is negative infinity Continuously compounded return on portfolio? Convert simple interest to continuously compounded Find the present value of a future dollar amount Expected return is average of all returns in probability distribution Stock’ s expected return is median plus half standard deviation squared Expected return varies with time Uncertainty varies with square root of time Is your portfolio manager talking holding-period returns? Lock Random Seed lets you create the same price path with variations Dividend payments reduce the price of a stock Dividends shift price probability distribution down A dividend yield shifts price probability distribution down A call gives you the right to buy a stock at a pre-set price Simulate potential outcomes of investing in a call Histogram approximates probability distribution for option Option's expected return is average of returns in probability distribution Color deciles link stock forecast to option forecast At extremes of probability distributions, divide into more intervals Put gives you right to sell a stock at a pre-set price Simulate potential outcomes of investing in put Calculate put’ s probability of profit and expected return If you’ re thinking and counting trading days, set days per year to 252 Does the expression probability density function make your brain hurt? An option’ s probability-weighted net present value It’ s like doing discounted cash-flow analysis in corporate finance Animation calculates cost of setting up delta hedge Black-Scholes assumptions envision a risk-neutral world Black-Scholes sets expected return equal to risk- free rate For strike prices at extremes of wide distributions, use more intervals Black-Scholes value of a put If option has time value, don’ t exercise it early Out of the money options have only time value As put goes deep into the money, may be advantageous to exercise early. Option’ s value may be its early-exercise value—Black’ s approximation When to exercise deep-in-money put if underlying pays lumpy dividends? May be optimal to exercise on last ex-dividend date Option value depends on location of little squares relative to strike price What if put goes deep into money and underlying pays dividend yield? What if call goes deep into money and underlying pays lumpy dividends? Maybe exercise on last day before underlying goes ex-dividend for last time What if call goes deep into money and underlying pays dividend yield? Depends on yield, time value, volatility, expected return, risk-free rate If call on underlying that pays no dividends, never exercise early Deeper into money, less sensitive option value is to changes Vega—If volatility increases, value of call goes up Delta—When spot price increases, value of call goes up Theta—If underlying pays no dividends, call value goes down over time Rho—Increase in risk-free rate increases median return. Call value goes up. Vega—If volatility increases, distribution spreads and drops. Put value goes up. Delta—When spot price increases, value of put goes down Theta—As time passes, put’ s value goes down. Usually! Rho—Increase in risk-free rate increases median return. Put value goes down. From Black-Scholes value, extract stock’ s implied volatility Draw risk-neutralized, market-equilibrium forecast for stock If agree, then stock and option have same expected return If disagree, then use option to leverage expected return Bid and ask prices give different implied volatilities Different strike prices give us volatility smile Different expiration dates give us term structure of volatility Theoreticians keep building alternative models Market-equilibrium forecasts Calculate your forecast without dividends for a call’ s underlying Simulate potential price paths of a call’ s underlying Enter dividend schedule for a call’ s underlying Calculate calls’ probabilities of profit and expected returns Simulate call’ s potential investment outcomes If you think somebody's bubble is about to burst, buy puts Calculate your forecast without dividends for a put’ s underlying Enter dividend schedule for a put’ s underlying Calculate puts’ probabilities of profit and expected returns Simulate put’ s potential investment outcomes Conversation with animations Your value at risk An investment strategy that allows you to express your views and have your portfolio’ s value never go down Invest risk free an amount that interest will grow back to original portfolio value Translate your beliefs into a forecast Invest foregone interest in options
Jerry Marlow
Financial Writer
Persuasive Writing about Complex Issues
Editing of Dull Writing into Powerful Prose
Transformation of Dull Speakers into Dynamos
Tutorials on Stock Options, Financial Theory and Black-Scholes Options-
Pricing Theory
Valuation of Employee Stock Options in Divorce Proceedings
Samples of Financial Writing
Samples of Persuasive Writing
jerrymarlow@jerrymarlow.com
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