Option Volatility and Pricing (Natenburg) - Chapter 1

in #steemiteducation6 years ago (edited)

The reason I'm doing this is that I left my teaching career to pursue bigger and better things. This is it! Known as the professional trading career and can make you over $100,000 USD a year in commission if you know it well and can use your knowledge to provide for a big company.

Notes on Option Volatility and Pricing (by Natenburg)


Before I begin I would like to make sure that you know what an option is because they can be a little strange compared to stocks. I like to think of them as stocks with insurance, but where there is a winner, there is always a loser. There are two types, a call option and a put option, trading them on an exchange is known as futures.

  • Call option example:
    (The right to buy) A current stock price is $100. The seller gives you the right to buy 10 shares of the stock for $103 anytime in the next month, but you pay a premium for each share, say $2. At this point you pay $20 for the contract and need a break even point, calculated by 10*103 + 20 = 1050. Therefore, if the share price goes past $105, you make the trade!
    Call.png
  • Put option example:
    (The right to sell) A current stock price is $100. The buyer gives you the right to sell 10 shares of the stock for $97 anytime in the next month, but you pay a premium for each share, say $2. At this point you pay $20 for the contract and need a break even point, calculated by 10*97 - 20 = 950. Therefore, if the share price goes down past $95, you as the seller now buys the cheaper stock on the market and then sell it via the contract!
    Put.png

Chapter 1 – Financial Contracts

  • Spot or Cash Transaction – both partners agree on terms, followed immediately by an exchange of money for goods.
  • Forward Contract – Goods to be exchanged at a later date.
  • Expiration Date or Maturity¬ – End of contract period.
  • Futures Contract – When a forward contract is traded on an organized exchange.
  • Option Contract – Both parties agree to a forward contract with a premium.
  • Call Option – the right to decide at a later date whether to buy.
  • Put Option – Gives one party the right to sell at a later date.
  • Exercise Price – How much the buyer of a policy (insurance) will receive if event occurs.
  • Derivative Contracts – forwards, futures, and options contracts.

Buying and Selling

  • Open Interest – the number of contracts traded on an exchange that have not yet been closed.
  • Long and Short – If a trader first buys a contract (an opening trade), he is long the contract. If the trader first sells a contract (also an opening trade), then he is short the contract. Long and short refer to the act of making as either going long (buying) or going short (selling).
  • Diagram


  • Long trader wants market to rise.
  • Short trader wants market to fall.

Notional Value of a Forward Contract

  • Notional Value or Nominal Value – Number of units times unit price.

Settlement Procedures

  • Realized Profit – Finishing the cycle above, otherwise no profit is made.
  • Margin Deposit – The deposit made to trade futures (tax, I like to call it).
  • Futures-type settlement, where there is an initial margin deposit followed be daily cash transfers, is also known as margin and variation settlement.
  • Physical Settlement – when a trader holds it to maturity.


  • Note: They are using the previous current position because that is how much worth their position was that day when futures were sold.

Market Integrity

  • Clearinghouse – Assumes ultimate responsibility for ensuring the integrity of all exchange-traded contracts.
  • Clearing Firm – The clearinghouse is made up of these. Processes trades made by individual traders and agrees to fulfill any financial obligation arising from those trades.
  • The Clearing Process:

Source:

Natenberg, Sheldon. Option Volatility and Pricing Advanced Trading Strategies and Techniques. 2nd ed., McGraw-Hill Education, 2015.

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Read this tutorial well and become a millionaire with me! Cheers!

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What a great little crash course on options. The examples are so important. I didn’t. Realize you were once a teacher. How long did you teach? Regret leaving,

I taught for 5.5 years. From when I was 21 to now. All grades math, physics, computer science. If you look at my old page you can see I was doing really well, making 20 dollars a post consistently on some my steemiteducation posts. It was nice. Towards the end it felt like a job, that's why I stopped posting. I missed it, but had to make the new account to continue. There is no way I will regret leaving, so long as I find a job in the next two months. Haha.

You quit teaching to go into trading? I wasn't aware of that -- how long ago did you make that decision?

A few weeks ago. Haha. I had a lot of think time on my journey. Figured that it was time. After 5 years of it not getting better, and it won't, I learned it was a waste of time. When I went in to tell them I also found out the the new administration gave me all Geometry (the shittiest class that I have never had before). I would have quit then anyway.

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