Sunday, November 15, 2015

Ursone, How to Calculate Options Prices and Their Greeks

Those option traders who care about the Greeks (and not all do) normally rely on trading platforms for their calculated values. Why do the calculations yourself when an algorithm can do it for you? Just as no adult works out a long division problem on paper, almost no option trader bothers to use the Black Scholes model to solve for a value that he can find by plugging a few numbers into an online calculator.

The problem with taking this shortcut is that most option traders don’t understand how their positions can change prior to expiration. They don’t know what’s under the hood. And, unlike driving a car from point A to point B, where the road is relatively straight, the car is reliable, and you can arrive safely at your destination in blissful ignorance of how the parts of the car work, trading options without any knowledge of how the Greeks affect both one another and the price of options can be lethal.

Pierino Ursone’s How to Calculate Options Prices and Their Greeks: Exploring the Black Scholes Model from Delta to Vega (Wiley, 2015) sets out to fill this void. It requires no advanced math skills (though occasionally it invokes Excel to make the reader’s life easier) but instead offers mostly back of the envelope calculations.

For instance, the 20% to 80% delta region is almost linear. “This linearity promotes working with a lot of rules of thumb and easy derivations for the Greeks. It is a strong tool for being able to come up with values for the Greeks without applying the option model.” (p. 79)

The book is not for beginning option traders, but at the same time I don’t think one should wait too long before tackling the material it covers. I personally learned quite a bit from it, much of practical value. And it’s book I’ll keep around for when I need a refresher course.

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