Stock and Options in the HT Stefano Grazioli

Critical Thinking Easy meter Optional Lab?

You do the talking Name, major… Learning objectives Things you like about the class Things that can be improved Attitude towards the Tournament

How stock prices are computed by Athens - the electronic market Gather historical values for the SP500 for a recent, multi-week period Compute volatility (sigma) and rate of growth (g) of the SP500 Gather historical prices for each ticker for the same period Compute volatility (sigma) and beta correlations between each ticker and SP500 Project the SP500 price into the future using sigma and g assumed constant. Add a little noise Project each ticker price assuming beta and sigma constant Add a little noise Create bid and ask for the day Release stock bid/ask prices every 60 seconds in the StockMarket table

What Is New In Technology? WINIT What Is New In Technology?

HT Datamodel

Option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset (e.g., a stock) at a specific price on or before a specified date Options are derivatives.

CBOE CBOE trades options on 3,300 securities. More than 50,000 series listed. More than 1/4 of US option trading Hybrid market: 97% total (68% volume) is electronic http://www.theocc.com/webapps/exchange-volume?reportType=D&instrumentType=both Source: CBOE & OCC web site – 2015 & 2019 - Table includes CBOE + C2 combined

Example Scenario You just inherited 1,000,000 Apple stocks. @ $180 -> $180,000,000. You are pretty happy. But you are also worried. What if the price drops to $150? You need some kind of insurance against that. Somebody is willing to commit to buying your Apple stock at $180 (if you want), two years from now. But she wants $10 per stock. Now. You decide that it is a good deal. So, you buy 1,000,000 contracts that give you the choice to sell your stock at the agreed price two years from now. You have bought 1,000,000 put options.

Put Options A put option gives to its holder the right to sell the underlying security at a given price on (or before) a given date. Think “insurance”

Another Scenario You are an executive at Netflix. You make $1,000,000 a year. You are pretty happy. The Board wants to make sure that you will do your best to keep the price of the Netflix stock up. Rather than giving you a well-deserved raise, they offer to you a deal. They promise that in three years they will give you the chance to buy 100,000 stocks at $350 each. Right now the stock is valued at $360. If the company does well, the stock price could go as up as $400. So you think: “In three years I could just get my 100,000 @ $350 and then immediately sell them back to the market for $400....” You conclude that an extra $5,000,000 in your pocket is a good thing. You have been given 100,000 call options.

Call Options A call option gives to its holder the right to buy the underlying security at a given price on or by a given date Think “reservation price"

“spot” (i.e., market) price Nomenclature option price = premium Call Option can buy 1 TESLA stock @ $280.00 on 15 May 2019 underlier TESLA Stock Price: $300.00 Put Option can sell 1 TESLA stock @ $350.00 on 15 May 2019 strike price “spot” (i.e., market) price expiration: European vs. American

How option prices are computed by Athens - the electronic market Compute historic volatility (sigma) Use the stock prices computed in the process described earlier and the Use the Black Scholes model to price the options assuming that the volatility is constant Project each Symbol price into the future Add a little noise Create bid and ask for the day Release Option bid/ask prices every 60 seconds in the StockMarket table

Market Mechanics in the real world and in the Tournament Market listed: bid & ask Buyer & seller: holder & writer Long & short positions Blocks of 100 – NOT FOR THE TOURNAMENT Option class: defined by the underlier and type Option series: defined by an expiration date & strike example: APPL May Call 290 Expiration: Sat after the 3rd Friday of the month American vs European (TOURNAMENT = EUROPEAN) Transaction costs: commissions on trading and exercising.