Options & Volatility

Who was the first known options trader and what did he do?

Thales of Miletus, who secured rights to olive presses expecting a strong crop, effectively purchasing a call option.

Define a call option.

The right, not the obligation, to buy an asset at a fixed price on or before a specified date.

Define a put option.

The right, not the obligation, to sell an asset at a fixed price on or before a specified date.

What is the 'underlying' in options?

The asset or instrument on which the option derives its value.

What does 'strike price' mean?

The price at which the option holder can buy (call) or sell (put) the underlying.

What are the two components of option value?

Intrinsic value and extrinsic (time) value.

What does it mean when an option is 'in the money'?

It has intrinsic value. For a call: spot > strike; for a put: strike > spot.

What type of option can be exercised any time before expiry?

American option.

What is delta-neutral trading?

Strategy that offsets risk from directional price moves by balancing positions using the delta ratio. Ex: Long 75 Oct, Short 100 Jan if spread delta is 0.75.

What is a synthetic call?

Long underlying + long put = synthetic call.

What is a synthetic put?

Long call + short underlying = synthetic put.

How does put-call parity work?

Call = Put + Forward; or Call - Put = Forward price of underlying.

If a 100 call is $8 and a 100 put is $8.50, and future = 100, what’s the arbitrage?

Sell put, buy call, short future: Profit = $0.50 (Conversion).

What is delta?

Measures how option price changes with underlying price. Roughly, the probability of finishing ITM.

What is gamma?

Rate of change of delta with respect to the underlying.

What is theta?

Measures time decay: value lost per day.

What is vega?

Sensitivity of option value to changes in volatility.

What happens to call and put value if underlying price rises?

Call increases, put decreases.

What does the Black-Scholes model do?

Provides theoretical value for a European call option.

What is the formula for d1 in Black-Scholes?

d1 = [ln(S/X) + (r + σ²/2)t] / (σ√t)

What is the Black-Scholes formula for call price?

C = SN(d1) - Xe^(-rt)*N(d2)

Which options Greek is most significant for ATM options?

Vega and Theta

In the option matrix, what should a volatility buyer with no market view use?

Straddle or Strangle.

How can you reduce cost of insurance in options?

Sell another option (e.g., covered call, risk reversal).

Define generation capacity and generation output.

Capacity is measured in MW (megawatts) — maximum output. Generation is in MWh (megawatt hours) — actual energy produced.