Option Contracts, Participants, Strategies, and Pricing from edX

In this course, we'll address the basics of option pricing. We'll provide a short review of discounting and future value and also discuss the Law of No-arbitrage, along with examples that illustrate its utility in pricing.

We will also define two basic option types, call and puts, and explain their payoffs. The six key inputs that determine option prices will be examined and the relationship of each input’s effect on the call price and put price will be evaluated. The survey of the types of participants in options markets will also be discussed. The trading strategies used by these participants will be presented, both with single options, as well as with combinations of options. Next, option pricing will be analyzed in detail. First, a binomial model is used to compute the price of an option in discrete time. The underlying assumption of no-arbitrage is addressed again as the option is priced going backward in time, from option expiration to the present. The hedge ratio at each node is calculated to emphasize the notion of replication. Then the Black Scholes formula will be derived, along with explanations of the assumptions underlying the model. The mathematics are carefully interpreted at each step, resulting in an intuitive description of the partial derivatives, or Greek sensitivities, within the Black Scholes partial differential equation.

What you'll learn

Provide the foundation of handling cash flows and implied forward rates from no-arbitrage.
Define the payoffs of vanilla calls and puts, and the six factors affecting their pricing.
Identify market participants and illustrate the option strategies they use.
Derive vanilla option prices using binomial trees, Black Scholes, and Monte Carlo simulations.
Provide intuition both in the Black Scholes partial differential equation and the formula.

What's inside

Syllabus

Module 01: The Basics

Module 02: Option Contracts

Module 03: Participants and Strategies

Module 04: Option Pricing

Module 05: Review

Good to know

Know what's good

, what to watch for

, and possible dealbreakers

Provides the foundation of handling cash flows and implied forward rates from no-arbitrage

Derives vanilla option prices using binomial trees, Black Scholes, and Monte Carlo simulations

Explores the basics of option pricing, including the Law of No-Arbitrage

Defines the payoffs of vanilla calls and puts, and the six factors affecting their pricing

Taught by Jack Farmer, an instructor with expertise in option pricing and its applications in finance

Requires a strong foundation in mathematics, particularly calculus and probability

Activities

Be better prepared before your course. Deepen your understanding during and after it. Supplement your coursework and achieve mastery of the topics covered in Option Contracts, Participants, Strategies, and Pricing with these activities:

Review basic probability and statistics

Show steps

Brush up on your probability and statistics skills to strengthen your understanding of option pricing models.

Browse courses on Probability

Show steps

Review notes or textbooks on probability and statistics
Solve practice problems to test your understanding

Read 'Options, Futures, and Derivatives' by John C. Hull

Show steps

Supplement your course content by reading an authoritative book on options, futures, and derivatives to gain a deeper understanding of the subject matter.

View Options, Futures, and Other Derivatives on Amazon

Show steps

Read the chapters relevant to the course topics
Take notes and highlight important concepts

Follow online tutorials on option pricing techniques

Show steps

Expand your understanding of option pricing techniques by exploring online tutorials that provide step-by-step guidance and demonstrations.

Browse courses on Option Pricing

Show steps

Identify reputable online courses or tutorials on option pricing
Follow the tutorials, take notes, and practice the techniques

Five other activities

Expand to see all activities and additional details

Show all eight activities

Join a study group or online forum

Show steps

Enhance your learning experience by engaging with peers, sharing insights, and discussing concepts to strengthen your understanding.

Browse courses on Options

Show steps

Find a study group or online forum relevant to the course
Participate in discussions, ask questions, and contribute your ideas

Solve practice problems on option pricing

Show steps

Practice applying the concepts of option pricing through exercises and drills to improve your problem-solving skills.

Browse courses on Option Pricing

Show steps

Find practice problems in textbooks or online resources
Solve the problems, checking your answers against solutions

Develop a presentation or infographic on option pricing strategies

Show steps

Reinforce your understanding by creating a presentation or infographic that explains option pricing strategies, enhancing your ability to communicate these concepts to others.

Browse courses on Option Pricing

Show steps

Research and gather information on option pricing strategies
Design and develop your presentation or infographic
Present or share your creation with others

Build a simple option pricing model

Show steps

Enhance your understanding of option pricing models by creating your own, allowing you to explore the concepts in a hands-on way.

Browse courses on Monte Carlo simulations

Show steps

Choose a simple model, such as the binomial tree model
Implement the model in a programming language
Test and validate your model using known inputs and outputs

Participate in a trading simulation or competition

Show steps

Apply your theoretical knowledge in a practical setting by participating in a trading simulation or competition, enhancing your decision-making skills.

Browse courses on Options Trading

Show steps

Find and register for a trading simulation or competition
Develop and implement trading strategies
Monitor and evaluate your performance

Career center

Learners who complete Option Contracts, Participants, Strategies, and Pricing will develop knowledge and skills that may be useful to these careers:

Derivatives Trader

Derivatives traders buy and sell derivatives, which are financial instruments that derive their value from an underlying asset. This course is helpful for derivatives traders who want to be able to trade options. The course covers the basics of option pricing, the different types of option strategies, and the key option pricing models and formulas.

See salaries and explore the career path for Derivatives Trader

Portfolio Manager

Portfolio managers oversee the investment portfolios of individuals and institutions. This course is helpful for portfolio managers who want to be able to invest in and manage option strategies for their clients. The course covers the different types of market participants and the strategies they use to trade options, the key option pricing models and formulas, and the assumptions and applications of the Black Scholes model.

See salaries and explore the career path for Portfolio Manager

Market Maker

Market makers are responsible for buying and selling stocks, bonds, and other financial instruments to ensure that there is always a market for these assets. This course is helpful for market makers who want to be able to price and trade options. The course covers the basics of option pricing, the different types of option strategies, and the key option pricing models and formulas.

See salaries and explore the career path for Market Maker

Risk Manager

Risk managers identify and assess financial risks and develop strategies to mitigate them. This course is helpful for risk managers who work in financial institutions that trade options or have exposure to options. The course covers the six key inputs that determine options prices, the different option types, the key option pricing models and formulas, and the concept of arbitrage to analyze risk factors.

See salaries and explore the career path for Risk Manager

Hedge Fund Manager

Hedge fund managers invest money on behalf of their clients in a variety of assets, including stocks, bonds, and options. This course may be helpful for hedge fund managers who want to be able to invest in and manage option strategies for their clients. The course covers the different types of market participants and the strategies they use to trade options, the key option pricing models and formulas, and the assumptions and applications of the Black Scholes model.

See salaries and explore the career path for Hedge Fund Manager

Financial Analyst

Financial analysts research investments and make recommendations to portfolio managers and clients. This course is helpful for financial analysts who wish to develop greater skill and understanding related to options trading. The course covers the six key inputs that determine options prices, the different option types, and the key option pricing models and formulas.

See salaries and explore the career path for Financial Analyst

Structured Product Manager

Structured product managers develop and sell structured products, which are financial products that are designed to meet the specific needs of investors. This course may be helpful for structured product managers who want to be able to develop and sell structured products that include options. The course covers the different types of option strategies and the key option pricing models and formulas.

See salaries and explore the career path for Structured Product Manager

Quantitative Analyst

Quantitative analysts develop and use mathematical and statistical models to analyze financial data. This course may be helpful for quantitative analysts who want to work with options. This course covers the different option types, the key option pricing models and formulas, and how to use a binomial tree to compute the price of an option in discrete time.

See salaries and explore the career path for Quantitative Analyst

Securities Analyst

Securities analysts research and make recommendations on stocks, bonds, and other financial instruments. This course may be helpful for securities analysts who want to be able to analyze and make recommendations on options. The course covers the basics of option pricing, the different types of option strategies, and the key option pricing models and formulas.

See salaries and explore the career path for Securities Analyst

Trader

Traders buy and sell stocks, bonds, commodities, and other financial instruments for their clients or for their own account. This course may be helpful for traders who want to be able to trade options. This course covers the basics of option pricing, the different types of option strategies, and the key option pricing models and formulas.

See salaries and explore the career path for Trader

Financial Planner

Financial planners help individuals and families plan for their financial future. This course may be helpful for financial planners who want to be able to recommend options strategies to their clients. The course covers the different types of option strategies and the key option pricing models and formulas.

See salaries and explore the career path for Financial Planner

Data Scientist

Data scientists use data to solve business problems. This course may be helpful for data scientists who work in the financial industry, particularly in the area of risk management or pricing. The course covers the basics of option pricing, the different types of option strategies, and the key option pricing models and formulas.

See salaries and explore the career path for Data Scientist

Actuary

Actuaries use mathematical and statistical techniques to assess risk and uncertainty. This course may be helpful for actuaries who want to work in the financial industry, particularly in the area of risk management or pricing. The course covers the basics of option pricing, the different types of option strategies, and the key option pricing models and formulas.

See salaries and explore the career path for Actuary

Compliance Officer

Compliance officers ensure that their companies comply with all applicable laws and regulations. This course may be helpful for compliance officers who work in the financial industry, particularly in the area of options trading. The course covers the basics of option pricing, the different types of option strategies, and the key option pricing models and formulas.

See salaries and explore the career path for Compliance Officer

Investment Banker

Investment bankers work with businesses to do many kinds of transactions including mergers and acquisitions, raising capital, and initial public offerings. This course may be helpful for investment bankers who want to work with clients who trade options.

See salaries and explore the career path for Investment Banker