Intro to Options

Plus CFTC bottom line

Housekeeping: Great turnout. video sometime this week. Notes attached.

CFTC bottom line:

Bank swap dealing desks are completely frozen now selling less than 800 futures in a $100 rally. They are being handcuffed and frozen pending the election.

WARNING: that means they will be helped on election night if this market spikes. BIS is keeping a ton of powder dry. DO NOT ASSUME THIS IS OVER.

The powers that be do not want Gold to be a poor reflection on the US election. they may sell it form 100 higher.. they may sell it from unchanged.. but they will sell it.. The wild card is the BRICS behavior.

Intro to Options

1. Today’s Textbook Topics

2. Textbook Definitions

3. Uses- (increase or decrease risk)

   1. To make money- directional opinions, dividend/income stream

   2. To save money- insurance, risk mitigation

4. Practical applications - when/how/ what/ where

   1. Directional use- small-medium-large risk/reward

   2. Option writing for income.. risk reward vs margin calls

5. Why use them (leverage and limits)

   1. limited risk, unlimited reward- at a price (prop bets)

   2. defined risk- at a price (insurance)

   3. very customizable- lego blocks (embedded optionality)

6. P and L Graphs- structures for risk mgt at expiration and over time- ongoing

7. Greeks- Delta, Gamma, Theta, Vega, Rho - intro today

8. Volatility- separate class

   1. Implied and realized (real/historical)

   2. Probabilities

   3. Smiles and curves

   4. Skewness, Kurtosis, etc

9. Modelling- Black Scholes and beyond.

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1- Today’s Topics

2- Textbook Definitions

A legal contract that gives the holder the choice to exercise the rights specified in it.

• Call- The buyer/owner of the contract has the right/choice to purchase an underlying asset from the seller/vendor (obligated party) of the contract at a predetermined price for a specified period of time

• Put-The buyer/owner of the contract has the right/choice to sell an underlying asset to the seller/vendor (obligated party) of the contract at a predetermined price for a specified period of time

Real life examples

• calls

• puts

• premium paid