22 lines
1.5 KiB
Plaintext
22 lines
1.5 KiB
Plaintext
, CHAPTER 40
|
||
Advanced Concepts
|
||
As the option markets have matured, strategists have been forced to rely more on
|
||
mathematics in order to select new positions as well as to discern how their positions
|
||
will behave in fluctuating markets. These techniques can be used on simple strategies,
|
||
such as bull spreads or ratio spreads, or on far more complex portfolios of options.
|
||
First, the concept of implied volatility will be examined in more detail, prima
|
||
rily as an aid in choosing new positions that have a positive expected return. Then,
|
||
the concept of risk management will be explored. In effect, one can reduce his option
|
||
position into several components of risk measurement that can be readily under
|
||
stood. This chapter describes the techniques used to evaluate one's position, and
|
||
shows how to use this information to reduce the risk in the position. The actual math
|
||
ematical calculations required to perform these analyses are included at the end of
|
||
the chapter.
|
||
NEUTRALITY
|
||
In many of the examples in previous chapters, it was generally assumed that one
|
||
would take a "neutral" position in order to capture the pricing or volatility differen
|
||
tial. Why this concentration on neutrality? Neutrality, as it applies to option positions,
|
||
means that one is noncommittal with respect to at least one of the factors that influ
|
||
ence an option's price. Simply put, this means that one can design an option position
|
||
in which he can profit, no matter which way the underlying security moves.
|
||
846 |