Table of Contents

1. Series Page
2. Title Page
3. Copyright
4. Dedication
5. Introduction
   1. Additional Resources
6. Chapter 1: What Is an Option, and How Do Options Work?
   1. How Options Are Created, Extinguished, and Settled
   2. Exercising an Option
   3. Assignment
   4. Deliverables
   5. Behavior of Option Prices
   6. Option Premium
   7. Moneyness
   8. The Relationship between Puts, Calls, and the Underlying Asset
   9. Leverage and Risk
7. Chapter 2: Valuing Options with the Black–Scholes–Merton Option-Pricing Model
   1. Assumptions of the Black–Scholes–Merton Option Pricing Model
   2. The Black–Scholes–Merton Option-Pricing Model
   3. Intuition behind the Option-Pricing Model
   4. Understanding the Drivers of Option Prices
   5. Putting It All Together: The Total Differential and Return Attribution
   6. Notes
8. Chapter 3: Trading Volatility
   1. Realized Volatility
   2. Implied Volatility
   3. Skew and the Volatility Smile
   4. Term Structure of Volatility
   5. Volatility Surface
   6. The Relationship between Realized Volatility and Implied Volatility
   7. How to Trade Volatility
   8. Gamma Scalping
   9. Straddles
   10. Strangles
   11. Calendar Spreads
9. Chapter 4: Are Options Fairly Priced?
   1. Modern Portfolio Theory (MPT)
   2. Capital Asset Pricing Model (CAPM)
   3. Evaluating Historical Returns on Put Options
   4. Evaluating Historical Returns on Call Options
   5. Conclusions about Option Returns
   6. Why Do Options Behave as If They Are Overpriced?
   7. Notes
10. Chapter 5: Fundamental Option Strategies
    1. Single-Leg Puts and Calls
    2. Vertical Spreads
    3. Ratio Spreads
    4. Risk Reversals
    5. Call Spread Risk Reversals
    6. Income-Generating Strategies
11. Chapter 6: Portfolio Hedging Producing Enhanced Returns
    1. Anticipatory Hedging
    2. Permanent Hedging
    3. Optimal Hedging Strategies
    4. Hedging High-Yield Debt with Equity
    5. Building a Proper Hedge
    6. Diagonal Put Spreads
    7. Performance Simulation: Hedging High-Yield Bonds Plus a Diagonal Put Spread
    8. 1 × 2 Ratio Put Spreads
    9. Hedging Equity Portfolios with 1 × 1.1 Ratio Diagonal Put Spreads
12. Chapter 7: Option Strategies for Special Situations
    1. Option Strategy for Stocks under Heavy Short Interest
    2. Opportunities in Skew
    3. Dividend Capture
13. Chapter 8: Extracting Information from Options Prices
    1. Option-Implied Distribution of Expected Future Price
    2. Implied Borrowing Cost on the Underlying Security
    3. Put/Call Ratio
14. Chapter 9: Synthetics
    1. Put–Call Parity
    2. Synthetically Replicating Stock
    3. Synthetically Replicating a Call
    4. Synthetically Replicating a Put
    5. Synthetically Replicating Cash
    6. Creating Corporate Debt Synthetically
15. Chapter 10: Home Runs
    1. The Oil Trade
    2. Warren Buffett and Berkshire Hathaway—Selling Puts and Buying Calls
    3. The Louisiana Purchase—The Greatest LBO of All Time
    4. Bitcoin
16. Chapter 11: Strike-Outs
    1. The Carry Trade
    2. Portfolio Insurance
    3. Dotcoms Were Just Out-of-the-Money Calls
    4. Credit Blowup: Subprime Mortgage-Backed Securities
    5. Convergence Trades
    6. The Howie Hubler Trade (Short, Ratio Put Spread)
    7. The Latrell Sprewell Trade (Exercise In-the-Money Options)
17. Glossary
18. References
19. About Online Education and Option Trading Tools
20. About the Free Trial
21. Index
22. Free Trial for The Options Edge (9781119212416)
23. End User License Agreement

Guide

1. Table of Contents
2. Begin Reading

List of Exhibits

1. Chapter 1: What Is an Option, and How Do Options Work?
   1. Exhibit 1.1 Payoff Pattern for a Put and Call with a Strike Price of $25
   2. Exhibit 1.2 Premium = Intrinsic Value + Time Value
2. Chapter 2: Valuing Options with the Black–Scholes–Merton Option-Pricing Model
   1. Exhibit 2.1 Price of an Option vs. Price of the Underlying
   2. Exhibit 2.2 Delta vs. Price of Underlying Asset
   3. Exhibit 2.3 Call Option Price vs. Price of Underlying Instrument
   4. Exhibit 2.4 Gamma for a Put or Call
   5. Exhibit 2.5 Vega (Put or Call) vs. Price of the Underlying Security
   6. Exhibit 2.6 Vega vs. Time to Expiration
   7. Exhibit 2.7 Effect of Volatility on the Option Performance Curve
   8. Exhibit 2.8 Call Option Decay vs. Time to Expiration
   9. Exhibit 2.9 Three-Month Call Option Decay vs. Share Price
   10. Exhibit 2.10 Rho for Call and Put Options vs. the Price of the Underlying
   11. Exhibit 2.11 Phi for a Call and Put Option vs. Price of the Underlying Asset
   12. Exhibit 2.12 Return Attributions
   13. Exhibit 2.13 Probability of Call and Put Options Expiring in the Money vs. Share Price
   14. Exhibit 2.14 Probability of Call Option Trading in the Money vs. Share Price
3. Chapter 3: Trading Volatility
   1. Exhibit 3.1 Volatility Skew
   2. Exhibit 3.2 Skew in Volatility Terms
   3. Exhibit 3.3 Term Structure of Implied Volatility on S&P 500 Options
   4. Exhibit 3.4 Volatility Surface January 13, 2013
   5. Exhibit 3.5 Volatility Surface October 15, 2008
   6. Exhibit 3.6 Three-Month iVol versus 90-Day rVol
   7. Exhibit 3.7 Gamma Scalping
   8. Exhibit 3.8 Volatility Trading Simulation iVol = rVol
   9. Exhibit 3.9 Volatility Trading Simulation Sensitivity Analysis
   10. Exhibit 3.10 Payoff Pattern for a Long Straddle
   11. Exhibit 3.11 Payoff Pattern for a Long Strangle
   12. Exhibit 3.12 Value of Calendar Spread versus iVol, Price of Underlying Held Constant
   13. Exhibit 3.13 Value of Calendar Spread versus Underlying Price
   14. Exhibit 3.14 Value of Calendar Spread versus Time, ATM Strikes
4. Chapter 4: Are Options Fairly Priced?
   1. Exhibit 4.1 Efficient Frontier, Borrowing, and Lending Line
   2. Exhibit 4.2 Description of Beta and Examples
   3. Exhibit 4.3 Relationship between Returns and Market Risk
   4. Exhibit 4.4 Historical Monthly Returns in Percentage on One-Month S&P 500 Put Options
   5. Exhibit 4.5 Historical Monthly Returns on S&P 500 Index Put Option Returns
   6. Exhibit 4.6 Historical Performance Characteristics on One-Month S&P 500 Put Options
   7. Exhibit 4.7 Historical Return Alphas on S&P 500 Index Put Options
   8. Exhibit 4.8 Historical Alpha versus Correlation
   9. Exhibit 4.9 Put Betas versus Moneyness
   10. Exhibit 4.10 Historical Returns on S&P 500 Index Call Options
   11. Exhibit 4.11 Historical Return Alphas on S&P 500 Index Call Options
   12. Exhibit 4.12 Historical Alpha versus Correlation
   13. Exhibit 4.13 Call Betas versus Moneyness
   14. Exhibit 4.14
5. Chapter 5: Fundamental Option Strategies
   1. Exhibit 5.1 Payoff Pattern of a Long Three-Month At-the-Money Call
   2. Exhibit 5.2 Payoff Pattern of a Short Three-Month At-the-Money Put
   3. Exhibit 5.3 Payoff Pattern of a Long Three-Month Vertical (Bullish) Call Spread
   4. Exhibit 5.4 Payoff Pattern of a Short Three-Month Vertical (Bearish) Put Spread
   5. Exhibit 5.5 Payoff Pattern of a Short Three-Month 1 × 2 Vertical Ratio Call Spread
   6. Exhibit 5.6 Payoff Pattern of a Short Three-Month 1 × 1.25 Vertical Ratio Call Spread
   7. Exhibit 5.7 Bullish Risk Reversal
   8. Exhibit 5.8 Call Spread Risk Reversal
   9. Exhibit 5.9 Short Put Spread Risk Reversal
   10. Exhibit 5.10 Covered Call
   11. Exhibit 5.11 Cash-Covered Put
   12. Exhibit 5.12 Cash-Covered Put, Getting Paid for Selling a Stop Loss
   13. Exhibit 5.13 Iron Condor
6. Chapter 6: Portfolio Hedging Producing Enhanced Returns
   1. Exhibit 6.1 The Optimal or Perfect Hedge
   2. Exhibit 6.2 Total Returns on High-Yield Debt versus Equity
   3. Exhibit 6.3 Monthly Return Comparison, January 2005 to July 2015
   4. Exhibit 6.4 Efficient Frontier
   5. Exhibit 6.5 Performance of High-Yield Bonds Hedged with Three-Month, 30-Delta Put
   6. Exhibit 6.6 Return Comparison
   7. Exhibit 6.7 Option Decay for At-the-Money Options versus Time to Expiration
   8. Exhibit 6.8 Call Option Price Decay versus Moneyness
   9. Exhibit 6.9 Diagonal Put Spread Characteristics versus Three-Month, 30-Delta Put
   10. Exhibit 6.10 Aging of a Calendar Put Spread
   11. Exhibit 6.11 Profit/Loss for a Calendar Put Spread
   12. Exhibit 6.12 Total Return Comparison
   13. Exhibit 6.13 Relative Performance of the Hedged Portfolio
   14. Exhibit 6.14 Risk versus Return Statistics
   15. Exhibit 6.15 Calendar Put Spread Characteristics in a High-Volatility Environment
   16. Exhibit 6.16 Aging of a Diagonal Put Spread in a High-Volatility Environment
   17. Exhibit 6.17 Characteristics of a Three-Month 1 × 2 Ratio Put Spread
   18. Exhibit 6.18 Profit and Loss, 1 × 2 Ratio Put Spread
   19. Exhibit 6.19 Characteristics of a 1 × 1.2 Ratio Put Spread
   20. Exhibit 6.20 1 × 1.20 Ratio Put Spread
   21. Exhibit 6.21 Hedging with a 1 × 1.2 Calendar Put Spread
   22. Exhibit 6.22 Relative Performance of the Hedged Portfolio
   23. Exhibit 6.23 Risk versus Return Statistics of the Ratio Calendar Put Spread
   24. Exhibit 6.24 Efficient Frontier of Hedged Equity Portfolios
   25. Exhibit 6.25 Hedging IWM with a 1 × 1.1 Calendar Put Spread
   26. Exhibit 6.26 Relative Performance of the Hedged Portfolio
   27. Exhibit 6.27 Relative Performance of the Hedged Portfolio
7. Chapter 7: Option Strategies for Special Situations
   1. Exhibit 7.1 Short 1 × 2 Ratio Call Spread, Stock Trading at $25 a Share
   2. Exhibit 7.2 Profit/Loss on Short Ratio Call Spread
   3. Exhibit 7.3 Waiting for the Squeeze
   4. Exhibit 7.4 Price of Gold versus Skew
   5. Exhibit 7.5 Call Spread Risk Reversal on GLD Trading at $115/Share
   6. Exhibit 7.6 Profit/Loss Six-Month Call Spread Risk Reversal on GLD
   7. Exhibit 7.7 Short 1 × 3 Ratio Put Spread with Gold at $170/Ounce
   8. Exhibit 7.8 Profit/Loss Short Three-Month 1 × 3 Ratio Put Spread on GLD
   9. Exhibit 7.9 Valuing a Call Option with Discreet Dividends
   10. Exhibit 7.10 Change in Valuation of a Call Option Incorporating a Special Dividend
   11. Exhibit 7.11 Valuing of a Call Option the Day before a Special Dividend
8. Chapter 8: Extracting Information from Options Prices
   1. Exhibit 8.1 Probability Price in Three Months Is Between $29.00 and $30.00
   2. Exhibit 8.2 Option Implied Price Distribution
   3. Exhibit 8.3 Volatility Skew
   4. Exhibit 8.4 Envelope of Option Implied Expected Price Distributions
   5. Exhibit 8.5 Long Calendar Call Spread
   6. Exhibit 8.6 Profit/Loss on Short Calendar Spread
   7. Exhibit 8.7 Term Structure and Forward Spot Rate Curves
   8. Exhibit 8.8 Total Returns of S&P 500 versus Put/Call Ratio
   9. Exhibit 8.9 Total Return of GLD versus Put/Call Ratio
9. Chapter 9: Synthetics
   1. Exhibit 9.1 Capital Structure Examples
   2. Exhibit 9.2 Bond Description
   3. Exhibit 9.3 Synthetic Corporate Bond
   4. Exhibit 9.4 Synthetic versus Cash Bond
   5. Exhibit 9.5 Valuation Comparison
10. Chapter 10: Home Runs
    1. Exhibit 10.1 Historical Price of Crude Oil
    2. Exhibit 10.2 Historical Crude Oil Consumption
    3. Exhibit 10.3 Oil-Field Production Cycle
    4. Exhibit 10.4 Reserves & Estimated Cost of Production
    5. Exhibit 10.5 Equity Value Based on Imbedded Option
    6. Exhibit 10.6 Returns on E&P Companies from January 3, 2005, to July 1, 2008
    7. Exhibit 10.7 Crude Oil Volatility Term Structure, May 2008
    8. Exhibit 10.8 Crude Oil Volatility Skew, May 2008
    9. Exhibit 10.9 Crude Oil Trade Structure, May 2008, Crude at $114.56
    10. Exhibit 10.10 Total Return Analysis
11. Chapter 11: Strike-Outs
    1. Exhibit 11.2 Simplified Residential Mortgage-Backed Securities Deal Structure
    2. Exhibit 11.4 Typical CDO Structure Issued in 2006, BBB-Rated RMBS as Collateral