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by Michael Lovelady
Visual Quantitative Finance: A New Look at Option Pricing, Risk Management, and Structured Securities
Title Page
Copyright Page
Contents
Acknowledgments
About the Author
Preface
1. Introduction
Growth in Structured Securities
Growing Emphasis on Low Volatility and Dividends
Criticisms of Structured Securities
Demand for Quantitative Skills
Direction of Quantitative Finance
When I Realized It Might Be Easier
Try Again
The Spreadsheet
Visualizing the Result
What It Means and Why It Works: A Nontechnical Overview
It Doesn’t Get Too Complicated
An Integrated View of Risk Management
Endnotes
2. Random Variables and Option Pricing
Random Variables
Building the Spreadsheet
Correcting the Mistake
Optional: Additional Resources
3. An Overview of Option Pricing Methods
The Black-Scholes Formula
Black-Scholes Assumptions
The Binomial Option Pricing Method
Monte Carlo Methods
Putting Visual Quant in Context
Additional Reading, Advanced Topics, and Resources
Endnotes
4. Value-at-Risk and Conditional Value-at-Risk
How Likely Is Something?
Value-at-Risk
Multiple Stock VaR
Stock and Option VaR
Conditional Value-at-Risk
5. Full Black-Scholes Model
Adding Functionality to the Model
Stock Return Mean (Cell G3)
Stock Return Standard Deviation (Cell G4)
Discount Factor
Stock Price Median
Summary of New Formulas
Pricing Put Options
Effects of Assumption Changes
Endnote
6. The Lognormal Distribution and Calc Engine
Definition of the Lognormal Distribution
The Forward Equation
Cross Reference: Stochastic Differential Equations
The Backward Equation
The Calc Engine
Assigning Probabilities
Setting the Stock Price Range
Visualizing Option Pricing As Normal or Lognormal
7. Investment Profiles and Synthetic Annuities
What Is a Synthetic Annuity, and How Does It Work?
The Investment Profile
Assigning Probabilities Using Implied Volatility
Using Options to Reshape the Investment Profile
Adjusting the Profile for Behavioral Finance
Concentrated Stock Example
The Synthetic Annuity in Turbulent Markets
8. Stock-Only Investment Profile
The Purpose and Context of the Model
The Stock-Only Investment Profile
The Calc Engine
The Stock-Only Profit Calculation
Adding the Chart
Test: Stock-Only Investment Profile
9. Adding Options to the Model
Long Put Profit
Short Put
Expected Values
Black-Scholes Add-In
The Heading Formulas
Delta Formulas
Time Value and Total Premium Formulas
10. Option Investment Profiles
Long Call Option Investment Profile
Short Call Option
Long Put Option
Short Put Option
11. Covered Calls, Condors, and SynAs
Covered Call Investment Profile
Put–Call Parity
Iron Condor Investment Profile
Synthetic Annuity (SynA) Investment Profile
Adding a Customized Utility Function
Endnotes
12. Understanding Price Changes
Investing in XYZ
Attribution: Explaining Why the Option Price Changed
Endnote
13. The Greeks
The Option Greeks
Calculating Greeks: Formulas, Models, and Platforms
Delta
Theta
Vega
14. Tracking Performance
Tracking Template
TradeStation Platform
Putting It All Together: Synthetic Annuity Overview
Introduction to Chapters 14, “Tracking Performance,” and 15, “Covered Synthetic Annuities”
15. Covered Synthetic Annuities
Covered Synthetic Annuity (CSynA)
Example: Deere & Company
The Standard CSynA
Supplemental Material: The CBOE S&P 500 BuyWrite Index
BXM Study by Callan Associates
Index
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