Options in Practice - Investment Analysis

These flashcards cover key concepts and terms related to options trading, investment analysis, and the Black-Scholes model as discussed in the lecture notes.

Black-Scholes Option Valuation

A mathematical model for pricing options that takes into account factors like stock price, exercise price, risk-free rate, time to expiration, and volatility.

Implied Volatility

The market's forecast of a likely movement in a security's price, derived from the option's price.

Delta (Δ)

The change in the value of the derivative resulting from a unit increase in the stock price.

Gamma (Γ)

The change in Delta resulting from a unit increase in the stock price.

Vega (ν)

The change in the value of the derivative resulting from a unit increase in volatility.

Theta (Θ)

The change in the value of the derivative over a unit time.

Rho (ρ)

The change in the value of the derivative resulting from a unit increase in the interest rate.

Black-Scholes Model Assumptions

1. Geometric Brownian motion for stock price, 2. No transaction costs or taxes, 3. Continuous trading.

European Call Option

An option that gives the holder the right to buy an underlying asset at the strike price on the expiration date.

Protective Put

A strategy where an investor buys a put option to protect against a decline in the price of an asset.

Covered Call

A strategy where an investor sells call options against stocks they currently own.

Bull Spread

A strategy that profits from a moderate increase in the price of the underlying asset.

Bear Spread

A strategy that profits from a moderate decrease in the price of the underlying asset.

Straddle

A strategy that involves buying both a call and put option at the same strike price, betting on high volatility.

Strangle

A strategy similar to a straddle, but uses different strike prices for the call and put options.

Volatility Smile

The pattern of implied volatility over various strike prices, often seen in the options market.