Chapter 4: Options and Contingent Claims

In this section

• Call and Put Options: Definitions and Payoffs
  Explore the foundational concepts of call and put options, their payoff structures, and learn practical examples and best practices to manage option-related strategies.
• Intrinsic Value, Moneyness, and Time Value
  Comprehensive exploration of the definitions, mechanics, and practical applications of intrinsic value, moneyness, and time value for call and put options, with examples, diagrams, and exam-oriented insights.
• European vs. American Options
  Explore the key differences between European and American options, the pricing models used, and practical examples of early exercise considerations for both calls and puts.
• Covered Calls and Protective Puts
  Explore the mechanics, risk–reward profiles, and practical uses of covered calls and protective puts. Learn how these popular option strategies can enhance income, hedge downside risk, and shape portfolio outcomes.
• Option Strategies and Payoff Diagrams
  Explore various option strategies, their payoff diagrams, and practical considerations for real-world investing and risk management. Learn how to construct, evaluate, and visualize call and put-based strategies—from bullish to bearish to volatility plays—and gain insights to tackle exam-style scenarios confidently.
• Exotic Options (Binary, Barrier, Asian)
  Explore the fundamentals, payoffs, valuation, and applications of Binary, Barrier, and Asian Options, complemented by real-world use cases and exam-focused insights.
• Exchange Options and Compound Options
  Explore the mechanics, payoffs, and practical applications of exchange options and compound options within derivatives markets. Learn about Margrabe’s formula, Geske’s work on compound derivatives, key hedging strategies, and real-world use cases for corporate finance and risk management.
• Volatility Trading with Options
  A comprehensive exploration of how option traders profit from changes in implied and realized volatility, including key strategies such as straddles, strangles, and the use of volatility cones.
• Greek-Based Hedging Strategies
  A thorough exploration of Greek-based hedging strategies in options, including Delta, Gamma, Vega, Theta, Rho, and multi-Greek dynamic hedging with case studies, examples, and advanced discussions.
• Lookback, Shout, and Cliquet Options
  Explore the mechanics, payoffs, and practical applications of Lookback, Shout, and Cliquet options. Understand how path dependency and advanced models like Monte Carlo can help in structuring and valuing these exotic derivatives.
• Chooser and Rainbow Options
  Understand the flexibility of Chooser Options and the multi-asset complexity of Rainbow Options, including practical hedging applications, pricing methods, and real-world examples.
• Employee Stock Options
  A comprehensive look at Employee Stock Options (ESOs), their valuation, vesting schedules, and the accounting standards driving their recognition and expenses.
• Index and Basket Options
  An in-depth exploration of index and basket options, covering fundamentals, payoffs, valuation, and real-world applications for hedging and speculation.
• Structured Warrants and Warrants vs. Options
  Explore the mechanics and distinctions of structured warrants, traditional warrants, and exchange-traded options. Understand how dilution, exercise triggers, and issuer-specific features influence valuation and risk for both corporate and structured warrants.
• Real Option Approaches in Corporate Decision-Making
  Explore how real options—expansion, abandonment, and timing—enhance capital budgeting analysis by incorporating managerial flexibility and strategic value into corporate investments.
• Spread Options on Commodity Price Differences
  Explore how spread options derive their value from the price difference between two underlying assets, focusing on commodity spreads like crack spreads in energy markets.
• Volatility Targeting Strategies Using Options
  Learn how to systematically manage and adjust portfolio volatility through options-based strategies, exploring practical approaches like variance swaps, tail-risk hedging, risk parity, and more.