black-scholes made easy

8/8/2019 Black-Scholes Made Easy

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tock Options Animated Tutorial and Analytics

Black-Scholes Made Easyy Jerry Marlow

he fastest and easiest way to learn about stockptions,ption prices, stock-market volatility, and Black-

cholesptions pricing theory.

croll down. Take a look at the demonstrations,mulations,

nd analyses you can run with Black-Scholes Madeasy.he tutorial teaches you all about options, how to

un the demonstrations, how to run the simulations,

nd how to dohe analysis.

o find out how you can learn all about options the

ast,asy way with Black-Scholes Made Easy, click here.

o go to implied volatility calculator, click here.
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olatility means that a stock's future price path isncertain


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he more volatile a stock, the more uncertain itsuture value


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n option can make you a ton of money or you canose it all


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forecast for a stock is a bell-shaped curve


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ou are 99.7% certain the outcome will be withinhe curve


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ne chance in ten that price will be in any givenecile


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ou can translate a forecast into potential priceaths


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onte Carlo simulations show relationship betweenaths and forecast


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ontinuously compounded returns are normallyistributed


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tock-price changes are lognormally distributed


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rice paths are characterized by geometricrownian motion


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olatility is constant over the investment horizon


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ay not be your customary way of thinking


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ose all your money, rate of return is negativenfinity


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ontinuously compounded return on portfolio?


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onvert simple interest to continuouslyompounded


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ind the present value of a future dollar amount


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xpected return is average of all returns inrobability distribution


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tock s expected return is median plus halftandard deviation squared


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xpected return varies with time


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ncertainty varies with square root of time


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s your portfolio manager talking holding-periodeturns?


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ock Random Seed lets you create the same priceath with variations


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ividend payments reduce the price of a stock


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ividends shift price probability distribution down


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dividend yield shifts price probability distributionown


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call gives you the right to buy a stock at a pre-setrice


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imulate potential outcomes of investing in a call


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istogram approximates probability distribution forption


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ption's expected return is average of returns inrobability distribution


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olor deciles link stock forecast to option forecast


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t extremes of probability distributions, divide intomore intervals


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ut gives you right to sell a stock at a pre-set price


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imulate potential outcomes of investing in put


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alculate put s probability of profit and expectedeturn


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f you re thinking and counting trading days, setays per year to 252


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oes the expression probability density functionmake your brain hurt?


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n option s probability-weighted net present value


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t s like doing discounted cash-flow analysis inorporate finance


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nimation calculates cost of setting up delta hedge


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lack-Scholes assumptions envision a risk-neutralworld


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lack-Scholes sets expected return equal to risk-ree rate


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or strike prices at extremes of wide distributions,se more intervals


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lack-Scholes value of a put


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f option has time value, don t exercise it early


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s put goes deep into the money, may bedvantageous to exercise early.


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ption s value may be its early-exercisealue Black s approximation


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When to exercise deep-in-money put if underlyingays lumpy dividends?


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ay be optimal to exercise on last ex-dividend date


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ption value depends on location of little squareselative to strike price


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What if put goes deep into money and underlyingays dividend yield?


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What if call goes deep into money and underlyingays lumpy dividends?


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aybe exercise on last day before underlying goesx-dividend for last time


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What if call goes deep into money and underlyingays dividend yield?


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epends on yield, time value, volatility, expectedeturn, risk-free rate


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f call on underlying that pays no dividends, neverxercise early


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eeper into money, less sensitive option value is tohanges


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ega If volatility increases, value of call goes up


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elta When spot price increases, value of call goesp


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ho Increase in risk-free rate increases medianeturn. Call value goes up.


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elta When spot price increases, value of put goesown


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heta As time passes, put s value goes down.sually!


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ho Increase in risk-free rate increases medianeturn. Put value goes down.


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rom Black-Scholes value, extract stock s impliedolatility


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raw risk-neutralized, market-equilibrium forecastor stock


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f agree, then stock and option have same expectedeturn


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f disagree, then use option to leverage expectedeturn


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id and ask prices give different implied volatilities


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ifferent strike prices give us volatility smile


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ifferent expiration dates give us term structure ofolatility


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heoreticians keep building alternative models


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arket-equilibrium forecasts


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imulate potential price paths of a call snderlying


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nter dividend schedule for a call s underlying


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alculate calls probabilities of profit and expectedeturns


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imulate call s potential investment outcomes


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f you think somebody's bubble is about to burst,uy puts


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alculate puts probabilities of profit and expectedeturns


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imulate put s potential investment outcomes


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onversation with animations


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our value at risk


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n investment strategy that allows you to expressour views and have your portfolio s value nevero down


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nvest risk free an amount that interest will growack to original portfolio value


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ranslate your beliefs into a forecast


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nvest foregone interest in options

rry Marlownancial Writer

ersuasive Writing about Complex Issuesiting of Dull Writing into Powerful Prose
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ansformation of Dull Speakers into Dynamostorials on Stock Options, Financial Theory and Black-Scholes Options-

icing Theoryaluation of Employee Stock Options in Divorce Proceedingsmples of Financial Writingmples of Persuasive [email protected]

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