Pricing an Option Part 1

Today, I'm going to talk about how to price options. I'm not going to do a deep dive but I will look at the different variables that go into pricing an option. In the past few posts, I mentioned we pay 2 or 3 for the option to buy/sell,…

Options PnL Part 2

So, we looked at buying calls and buying puts. Respectively, the graphs look like: The blue graph is buying a call option with the strike price of 15 for a price of 2 (kink is at 15 and the most we can lose is 2). The orange graph is buying…

Options PnL Part 1

First, we'll look at general profit and loss graphs to make sure our audience understand basic algebra (Cartesian planes, slopes, intercepts, etc.). Then we'll take a brief look at futures. And finally, we'll touch on options. So first, what does your PnL graph look like if you purchased a single…

Contract Specifications

Given the nature of my job as a trader, it was of utmost importance to know everything about the product you were trading. As such, the details for the examples provided in this blog post can be a little bit daunting. To further complicate things, there might be some words…

Pricing a Future

There are a lot of variables to consider when we are talking about pricing a forward/future. For now, we'll simplify the problem and focus on the few key variables: the risk-free interest rate, the time until delivery date, and the underlying price. Since in a forward/future contract, we…

Sound the Retreat

Continuing from the previous post about market makers, let's look at an example. Let's set the scenario. Let's say this mystery contract ticks in nickels (0.05) and I always want an edge of 0.12. Also, I am willing to do 10 lots (contracts) at a time. Finally, our…

Bitcoin Futures Explained

On Dec 9, 2017 CBOE got into the bitcoin world by opening up a market on Bitcoin Futures. CME also plans to get into the cryptocurrency world by also offering futures on Bitcoins. There are a handful of subtle differences between these contracts. As an exercise to better understand the…