These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link.
Hello youtube welcome back we’ve just finished up a series of videos on pricing options and this video is the first in a new series on the option greeks i’ll be posting a new video every day and i’ll collect them all together into playlists to make it easier to follow a particular topic if you like this kind of content on youtube make sure you hit the subscribe
Button down below and hit the bell button as well if you want to be notified every time i put up a new video up until now we’ve learned a bit about financial options and the way that we price them and the factors like interest rate price of the underlying volatility and so on that affect the price of options in this class we’re going to look at the sensitivity
Of option prices to these factors and see how a knowledge of these influences can drive trading strategies and improve options trading techniques we will learn how much the movements in one or another of these factors changed the valuation of a given option so let’s discuss the idea of hedging to begin with hedging refers to all trading activity that reduces
Risk minimizes unwanted financial exposures or neutralizes portfolio risks in one way or another a well hedge trading book is a portfolio that should experience very few gains or losses no matter what kind of market movements occur when banks are financial institutions trade derivatives they usually do some sort of hedging in fact they pretty much always do
In particular market makers or middlemen will nearly always try to hedge away most of their exposures they’re usually just trying to earn profits from the bid-ask spread or from commissions earned on a per trade basis and they’re not really coming up with views on the direction of markets and trying to profit based upon that so the greeks then as i’ve mentioned
Is a term used in the options world for the measures the sensitivity of the price of a derivative to changes in individual parameter values when you hold all of the other parameters fixed their partial derivatives of the options price would respect to the individual parameter values they’re called the greeks because the most common of these sensitivities are
Denoted by greek letters the greeks are of great importance to active derivatives traders the greeks of the derivatives portfolio are crucial for understanding and risk management in options heavy portfolios the greeks tell a portfolio manager how the portfolio should behave in various market environments financial institutions will usually give a trader or a
Trading desk risk limits based upon portfolio greeks that must not be exceeded the greeks are all about change they tell us how option prices change when one of the inputs to the pricing formula changes calculus is the mathematical study of change and is used to derive the greeks instead of packing all of the greeks into one great big video i’ve done a short
Video on each of the greeks the next video that i’ll put up will be on delta which is the best known of the greeks don’t forget to hit the like and subscribe buttons and let me know in the comments section below if there are any other topics that you’d like me to cover in these videos these videos are all based on my book that’s called trading and pricing
Financial derivatives and it’s available on amazon i’ll put a link to it in the description down below i have lots of other videos as well up here on youtube so make sure you check them out that’s all for now talk to you later you
Transcribed from video
What are the Option Greeks? | Hedging Options | Risk Managing Options By Patrick Boyle