LEVEL II Course Curriculum

The Level II course is designed to bring the student from basic options strategies familiarity to expert level, and gain advanced options theoretical and practical knowledge. The course is divided into 6 lessons of approximately 2 hours duration.

Lesson 1 - Put/Call Parity

1.     Put/Call Parity

In this lesson "the 3 states of being" of an option during its lifetime are explained: In-the-money (ITM), at-the-money (ATM) and out-of-the money (OTM). The difference between time value and intrinsic value is explained; and the mathematical relationship between puts and calls of the same strike and expiry. The concept of Delta is introduced and the fact that in each strike, apart from the negative sign of the put deltas, the call and put deltas always add up to 100% or 1. The effects of interest rate and the cost of carry are discussed; and how it changes the theoretical value and Delta of deep ITM options.

2.     Synthetics (conversions and reversals)

From the put/call parity relationship synthetics are explained. Knowing both the put and call prices of a particular strike the price of the underlying can be deduced. Additionally, knowing any 3 of the 4 data points: call price, put price, strike price and underlying price, the fourth data point can be calculated.

Lesson 2 - Volatility

1. The importance of volatility in the option pricing model is explained.

2. Volatility is explained as a standard deviation. We look at the basic statistical properties of the lognormal distribution and also the scaling of volatility for time: daily, weekly, monthly, etc.

3. We discuss the relationship between Realised or Historical Volatility and Implied Volatility

4. We discuss how implied volatility can be conceived as the marketplace’s consensus of future realised volatility. 

5. Vega is explained as the metric of how an options price changes with movements in implied volatility.

6. Volga (Vomma) is explained as the rate of change of an option’s vega with respect to implied volatility.

Lesson 3 - Delta, Gamma and Vanna

1. Delta

The characteristics of the Delta are explained in several ways:

                        A.         The rate of change of the option's price/value with respect to a move in the underlying.

                        B.         Hedge ratio. How to affect a delta-neutral options position

                        C.         Theoretical or equivalent underlying position

                        D.         Probability. Ignoring the sign of the delta (positive for calls and negative for puts), the delta can be regarded as the probability of the option finishing in the money.

2. Gamma

Gamma is explained as the rate of change of the Delta with respect to a move in the underlying. Even though the deltas range from 0 to 100 for calls and from -100 to 0 for puts, the graphs are not straight lines and the "steepness" of the curve is the most at-the-money. So the ATM gamma is the highest.

3. Vanna. How the OTM Deltas change with movements in implied volatility

Lesson 4  - Theta, Charm, Rho, Introduction to Skew

1. Theta is explained.

Theta is described as the measure of how much an option's value decreases with the passage of time.

2. Charm. How the OTM Deltas change with the passage of time

3. Rho is explained.

Rho is described as the measure of how much an option's value changes with a movement in interest rates.

4. Introduction to Skew

Introduction to the volatility curve. The skew is explained as the difference between the implied volatilities in each strike of the same expiry month.

Lesson 5 - Skew

The four typical types of the volatility skew are explained:

            A. Smile skew - typical in calm and low volatility markets

            B. Reverse skew - typical in equity and equity index markets

            C. Forward skew - typical in energy and physical commodities markets

            D. Frown skew - typical in markets during periods of high volatility or disruption

The concept of the skew being the marketplace’s consensus or prediction of future implied volatility given a move upward or downward in the underlying, and the speed of the move.

Lesson 6 - Risk and Position Management

1. Delta hedging and the effects of Gamma

2. Vega management and volatility spreading

3. How to interpret the signals and information provided by the model. The model is a proprietary tool that displays in great detail the risks and exposures of any options position and its underlying. With such detailed information the student will learn how to manage risk in the most optimal way.

Lesson 7 - Instructions for usage of the Aurora risk model

      A. How to set up the model for different markets

      B. How to change input parameters such as ATM volatility and skew.

      C. How to enter positions and trades