War on Option Greeks – The weekend option pricing risk challenge

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Option Greeks. Dissecting Delta, Gamma, Vega, Theta & Rho

It doesn’t matter if you took the FRM, CFA, PRMIA, CERA, SOA, CAS or the FIA investment / risk management exam this November/December. There was one section in the curriculum that gave you pause, occasionally a headache, but more frequently became the leading indicator for a panic attack. As a graduate business school student, despite a full term of instructional seminars behind you, an interview or modeling question on Greeks could unseat the most sure footed Quants amongst us.

Option price sensitivities or Greeks have that impact on ordinary mortals reviewing derivative risk management sections of their text books. This weekend we declare war on Greeks with the full force and might of our Excel spreadsheet and a handy online instructional guide. If you have had enough of being cowed by delta, gamma, vega, theta and rho, pick up your Spartan shield and spear, charge your laptop, load Excel and follow us on what promises to be an exciting and interesting ride.

For best results, follow the session and try and build your own Excel spreadsheet using the information and sequence provided below. If you get lost or confused, drop us a note. Use the weekend wisely to finally overcome your fear of modeling option Greeks.

War on Option Greeks – Introduction – Preliminary skirmishes

Our game plan is simple. Build an Excel model and get the formula out of the way. Extend the model to simulate delta hedging and cash PnL. Use the model to build intuition.

The first phase of our war requires us to get comfortable with our primary weapons. An Excel spreadsheet that plots Greek behavior across multiple dimensions and a Monte Carlo Simulation that simulates hedge performance and accuracy. Go forth and build.

One word of warning. We assume that   you are comfortable with derivative pricing & Monte Carlo Simulation. If that is not true, please see the Option pricing 5 night free crash course.

Understanding Option Greeks – Introduction

Understanding Option Greeks – Analyzing Delta & Gamma

Understanding Option Greeks – The Guide to delta hedging using Monte Carlo Simulation

Understanding Option Greeks – Quick Reference Guide to Delta, Gamma, Vega, Theta & Rho

War on Option Greeks – Advance materials – Engagement

Once we have perfected our tools, it is time to dive deeper and engage the enemy head on.

Option Greeks & Delta Hedging – Calculating & Simulating Cash PnL

Option Greeks & Delta Hedging – PnL, Implied Volatility & Rho

Hedging Higher order Greeks. (Updated August 2014)

War on Greeks – The final frontier – Theta and Time Premiums.

Building volatility surfaces in Excel. (Added October 2014)

Congratulations. If you have built the Excel spread sheets and completed the above lessons you are now an official veteran of the war on Greeks campaign.

The above material is partially based on the Advance Risk Models course taught by Jawwad Farid at the SP Jain Campus in Dubai and Singapore to Exec. MBA and Global MBA students. Feel free to drop by and take a look at our free training course resource page.

Advance Risk Management Models Online Training Course

4 thoughts on “War on Option Greeks – The weekend option pricing risk challenge”

  1. You have a great website, and looks of it, a cool training program. I wish I could understand all these Acturial terms.
    Best wishes Jawad.

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