You can find the spreadsheets for this video and some additional materials here: drive.google.com/drive/folders/1sP40IW0p0w5IETCgo464uhDFfdyR6rh7 Please consider supporting NEDL on Patreon: www.patreon.com/NEDLeducation
Many thanks for all these videos. Can you please do some videos on the greeks (including high order ones) and how they are used to manage risks on the options trading strategies?
Thank you very much for the video Savva! One question, can you perform these calculations with the daily log return of the stock prices to be in theory more precise?
Another awesome video Savva! So each of your videos lures me to write something! Hope you won't mind me being so borring!😊 I know for Black-Scholes model from CFA exam, and I'm pretty familiar with its shortcomings, and the key issue here is how to determine, or better say how to predict the future volatility. So if we are currently in low volatility period and the option expires within let's say couple of months, so can we incorporate the presumption of low volatility and incorporate average value of volatility for low volatility period? Absolutely the same for higher volatility case?! So periods of low and high volatility are somewhat cyclical!
Hi Ivan, and thanks for the question and for so many insightful comments! I would say the main issues with Black-Scholes are 1) the assumption of constant volatility 2) the assumption of normality 3) the assumption of perfect capital markets. To address the first one, you could by all means use some volatility model and extrapolate it into the future. As for cyclical nature of volatility, I would say something like GARCH would explain volatility dynamics better than something like a sine curve and hence why the former is way more popular.
Hi, and happy you are enjoying the channel! As for your question, they are two different concepts, implied volatility is the level of volatility that makes option fair value (most commonly, at the money calls) consistent with their current market prices. Historical volatility is just the standard deviation of historical returns. If volatility is constant and Black-Scholes model assumptions are true, the two should be very close. Hope it helps!
Hi Nicholas, and thanks for the question! Bond options are much less commonly traded than stock options as credit risk and interest rate risk associated with bond investment are much easily and more naturally hedged and arbitraged using credit default swaps or conventional interest rate derivatives, respectively. However, you can still apply Black-Scholes to a bond option just like you do for a stock. The only issue here is that the assumption of non-dividend bearing underlying is much less realistic for bonds that typically yield coupons.
Hi Michael, and here is the link for the file: docs.google.com/spreadsheets/d/16c9ycpbJjWJiXQMVGZswnqPTmlGj1680/edit?usp=sharing&ouid=113436662715404606257&rtpof=true&sd=true.
Hi Vaidyanathan, and thanks for the suggestion! I was planning to record a video on Monte-Carlo simulations for option valuation very soon, so stay tuned!
The best way to derive a premium formula for an option is how I do it (and recommend others do also), and this is not the Black-Scholes formula: The Black and Scholes equation is wrong: The Black and Scholes (risk-neutral) premium is the first moment of the option expiry for an asset that has all risk and no market return (the risk-neutral measure), that which has been debased of market return (by holding portfolio returns fixed flat at r). This idiotic asset (the risk-neutral measure) is stochastically dominated by bonds in that bonds have the same return (r) but without the risk whilst it is stochastically dominated by stocks since stocks earn market return for the equivalent amount of risk: bonds have LOWER RISK for the SAME RETURN as the debased market asset (the risk-neutral measure) whilst stocks have HIGHER RETURN for the SAME RISK as the debased market asset (the risk-neutral measure) Either way, the 'risk-neutral measure' is totally idiotic and stochastically dominated by all non-redundant asset classes. It is not deep and it is not abstract. All it is is the market asset without return (which is then used to price the derivative and so is wrong and inaccurate). If a trader wants an option, then he must not take an offsetting position that nullifies the option position. There is nothing risk-neutral about that. An option premium must have a mean mu in the drift term, otherwise it is wrong... wrong for derivatives and wrong for efficient and non-communist finance. nb: I had to say 'no risk' when I sat several of the courses in undergraduate (almost two decades ago). It was clear as day to me then that it was inaccurate (and proved by me definitively now more than one decade ago). I debunk Black and Scholes fully here: drive.google.com/file/d/1drOy89roxTawddpbFv03MEgrNSRwPRab/view?usp=drive_link here is new theory for markets (crystal ball formula): drive.google.com/file/d/1POgaFZxaXpGPbxDh8p9IHP_Kr2-VXok5/view?usp=drive_link PhD examiner report 3: drive.google.com/file/d/1z2Cflnp1uQ059GIonv2lzfqOj0EcMXrv/view?usp=drive_link PhD examiner report 2: drive.google.com/file/d/1K07G377R0ZSUs9ax6EXAzYealrjbo2vS/view?usp=drive_link PhD examiner report 1: drive.google.com/file/d/1BXwbk-uFrQDH_es_T5FiIJOnJ_42oA0q/view?usp=drive_link
You can find the spreadsheets for this video and some additional materials here: drive.google.com/drive/folders/1sP40IW0p0w5IETCgo464uhDFfdyR6rh7
Please consider supporting NEDL on Patreon: www.patreon.com/NEDLeducation
Many thanks for all these videos. Can you please do some videos on the greeks (including high order ones) and how they are used to manage risks on the options trading strategies?
This is safely the best channel on RUclips
Thank you for your informative video.😉
Thank you very much for the video Savva! One question, can you perform these calculations with the daily log return of the stock prices to be in theory more precise?
Another awesome video Savva! So each of your videos lures me to write something! Hope you won't mind me being so borring!😊 I know for Black-Scholes model from CFA exam, and I'm pretty familiar with its shortcomings, and the key issue here is how to determine, or better say how to predict the future volatility. So if we are currently in low volatility period and the option expires within let's say couple of months, so can we incorporate the presumption of low volatility and incorporate average value of volatility for low volatility period? Absolutely the same for higher volatility case?! So periods of low and high volatility are somewhat cyclical!
Hi Ivan, and thanks for the question and for so many insightful comments! I would say the main issues with Black-Scholes are 1) the assumption of constant volatility 2) the assumption of normality 3) the assumption of perfect capital markets. To address the first one, you could by all means use some volatility model and extrapolate it into the future. As for cyclical nature of volatility, I would say something like GARCH would explain volatility dynamics better than something like a sine curve and hence why the former is way more popular.
Can you please do a video on calculating theoretical price of futures using cost of carry model
Hello Savva, your youtube Channel is incredibly good !
Do you know a way to approximate Implied Volatility using Historical Volatility ?
Thank you !
Hi, and happy you are enjoying the channel! As for your question, they are two different concepts, implied volatility is the level of volatility that makes option fair value (most commonly, at the money calls) consistent with their current market prices. Historical volatility is just the standard deviation of historical returns. If volatility is constant and Black-Scholes model assumptions are true, the two should be very close. Hope it helps!
Hello, thanks for the teaching. May I know if the spreadsheet was removed from the google drive? I cannot find it there. Thanks.
Hi Hugo, and thanks for the comment! Have just added the spreadsheet you asked for to the Google Drive.
@@NEDLeducation Thank you so much!!
Hi Savva do you know if there is an options calculator for bonds available? All I can find is for stocks. Thanks.
Hi Nicholas, and thanks for the question! Bond options are much less commonly traded than stock options as credit risk and interest rate risk associated with bond investment are much easily and more naturally hedged and arbitraged using credit default swaps or conventional interest rate derivatives, respectively. However, you can still apply Black-Scholes to a bond option just like you do for a stock. The only issue here is that the assumption of non-dividend bearing underlying is much less realistic for bonds that typically yield coupons.
I cannot seem to find the spreadsheets on the Google share drive. Can you include the link below? Thanks
Hi Michael, and here is the link for the file: docs.google.com/spreadsheets/d/16c9ycpbJjWJiXQMVGZswnqPTmlGj1680/edit?usp=sharing&ouid=113436662715404606257&rtpof=true&sd=true.
Would you able to simulate Option Valuation (Black Schole Model) using Monte Carlo simulation ?
Hi Vaidyanathan, and thanks for the suggestion! I was planning to record a video on Monte-Carlo simulations for option valuation very soon, so stay tuned!
Pleeeease siiir we need for vanna formula i think its hard can you help me
The best way to derive a premium formula for an option is how I do it (and recommend others do also), and this is not the Black-Scholes formula:
The Black and Scholes equation is wrong: The Black and Scholes (risk-neutral) premium is the first moment of the option expiry for an asset that has all risk and no market return (the risk-neutral measure), that which has been debased of market return (by holding portfolio returns fixed flat at r). This idiotic asset (the risk-neutral measure) is stochastically dominated by bonds in that bonds have the same return (r) but without the risk whilst it is stochastically dominated by stocks since stocks earn market return for the equivalent amount of risk:
bonds have LOWER RISK for the SAME RETURN as the debased market asset (the risk-neutral measure)
whilst
stocks have HIGHER RETURN for the SAME RISK as the debased market asset (the risk-neutral measure)
Either way, the 'risk-neutral measure' is totally idiotic and stochastically dominated by all non-redundant asset classes. It is not deep and it is not abstract. All it is is the market asset without return (which is then used to price the derivative and so is wrong and inaccurate).
If a trader wants an option, then he must not take an offsetting position that nullifies the option position. There is nothing risk-neutral about that. An option premium must have a mean mu in the drift term, otherwise it is wrong... wrong for derivatives and wrong for efficient and non-communist finance.
nb: I had to say 'no risk' when I sat several of the courses in undergraduate (almost two decades ago). It was clear as day to me then that it was inaccurate (and proved by me definitively now more than one decade ago).
I debunk Black and Scholes fully here: drive.google.com/file/d/1drOy89roxTawddpbFv03MEgrNSRwPRab/view?usp=drive_link
here is new theory for markets (crystal ball formula): drive.google.com/file/d/1POgaFZxaXpGPbxDh8p9IHP_Kr2-VXok5/view?usp=drive_link
PhD examiner report 3: drive.google.com/file/d/1z2Cflnp1uQ059GIonv2lzfqOj0EcMXrv/view?usp=drive_link
PhD examiner report 2: drive.google.com/file/d/1K07G377R0ZSUs9ax6EXAzYealrjbo2vS/view?usp=drive_link
PhD examiner report 1: drive.google.com/file/d/1BXwbk-uFrQDH_es_T5FiIJOnJ_42oA0q/view?usp=drive_link