1. Stock and Options in the HT
Stefano Grazioli

2. Critical Thinking
Easy meter
Optional Lab?

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

5. 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

6. What Is New In Technology?
WINIT
What Is New In Technology?

7. HT Datamodel

9. 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.

10. 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
Source: CBOE & OCC web site – 2015 & Table includes CBOE + C2 combined

11. 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.

12. 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”

13. 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 $350 and then immediately sell them back to the market for $ ”
You conclude that an extra $5,000,000 in your pocket is a good thing.
You have been given 100,000 call options.

14. 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"

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

17. 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

18. 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.