years worth of option education in under 90 minutes

A few days ago I got the idea to do a screencast where I use an option chain and greeks explain a bunch of vol trading concepts.

None of my front-ends really look like what I had in mind so I spent Wednesday building a minimal viable version to allow viewers to look over-my-shoulder as I explain some stuff.

On Friday, I just turned the camera and started blabbing. No prep. I had an open afternoon so no time constraint. I just let it rip. On a Twitter livestream.

I hear it was helpful. I decided to call it Years worth of option education in under 90 minutes. That was the most click-baity title I could give it and still live with myself.

I re-watched it to chronicle what you actually can learn. Turns out it’s a lot of stuff that’s pretty hard to come across if you haven’t spent time on a prop desk.

Give it a gander. Love to know what else can help.

Modeling a vol curve

• Computing a forward
• Specifying a vol curve with standard deviation gridpoints
• Computing the gridpoints
• Inputting skew parameters at the points to fit the market
• Using Excel’s linest function to get the coefficients of an n-order polynomial
• Using the curve to estimate IV for any strike

Option valuation

• Implementing Black Scholes for European-exercise style options
• Includes greeks and N(d1) and N(d2)
• Numerical methods for estimating gamma and theta

Interpreting skew

• How large skew values lead to counterintuitive probabilities as the implied distribution balances probability with magnitude
• Using vertical spreads to see the implied distribution
• Changing skew parameters to watch the spread prices change and the distribution shift
• How skew “corrects” the Black Scholes distribution to match empirical distributions
• Comparing implied distributions to “flat sheet” distributions

Understanding vol changes day over day

• The difference between fixed strike and “floating” strike vol changes
• How fixed strike vols change arise from the interaction of spot moves and skew parameters change
• Why fixed strike vol changes drive your p/l

Dissection

• How market makers actually use classic option structures and synthetic relationships
• Option traders “chunk” their positions to understand them just as seasoned chess players don’t see random configurations of pieces but see “mini-themes” that they understand deeply. For option traders these themes are structures like butterflies and condors
• How market makers “take structures out of the position” to minimize hedging costs

Decomposing vol p/l from greeks

• Learn how to use your gamma and theta to estimate the realized vol portion of your p/l
• Learn how to use your vega to estimate the implied vol portion of your p/l
• See how delta p/l comes form options and share positions
• Understand how the tug-of-war between gamma and theta relates to the stock’s move on the day

Uncategorized

• Pulling market data into Excel
• why the late 90s tech bubble was not irrational and how option markets understood that
• bubble distributions from the lens of the option market
• Put-call parity
• An intuitive way to estimate gamma p/l from middle school physics math: delta = velocity, gamma = acceleration, price change = time passage, and distance = p/l
• This shows why p/l is a function of the stock move squared