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In return for granting the option, called writing the option, the originator of
the option collects a payment, the premium, from the buyer. The writer of an
option must make good on delivering (or receiving) the underlying asset or
its cash equivalent, if the option is exercised.
An option can usually be sold by its original buyer to another party. Many
options are created in standardized form and traded on an anonymous
options exchange among the general public, while other over-the-counter
options are customized to the desires of the buyer on an ad hoc basis, usually
by an investment bank.
Option valuation
Every financial option is a contract between the two counterparties with the
terms of the option specified in a term sheet. Option contracts may be quite
complicated; however, at minimum, they usually contain the following
specifications:[3]
• whether the option holder has the right to buy (a call option) or the
right to sell (a put option)
• the quantity and class of the underlying asset(s) (e.g. 100 shares of
XYZ Co. B stock)
• the strike price, also known as the exercise price, which is the price at
which the underlying transaction will occur upon exercise
• the expiration date, or expiry, which is the last date the option can be
exercised
• the settlement terms, for instance whether the writer must deliver the
actual asset on exercise, or may simply tender the equivalent cash
amount
• the terms by which the option is quoted in the market to convert the
quoted price into the actual premium-–the total amount paid by the
holder to the writer of the option.
[edit] Black-Scholes
In the early 1970s, Fischer Black and Myron Scholes made a major
breakthrough by deriving a differential equation that must be satisfied by the
price of any derivative dependent on a non-dividend-paying stock. By
employing the technique of constructing a risk neutral portfolio that
replicates the returns of holding an option, Black and Scholes produced a
closed-form solution for a European option's theoretical price.[8] At the same
time, the model generates hedge parameters necessary for effective risk
management of option holdings. While the ideas behind the Black-Scholes
model were ground-breaking and eventually led to Scholes and Merton
receiving the Swedish Central Bank's associated Prize for Achievement in
Economics (often mistakenly referred to as the Nobel Prize),[9] the
application of the model in actual options trading is clumsy because of the
assumptions of continuous (or no) dividend payment, constant volatility, and
a constant interest rate. Nevertheless, the Black-Scholes model is still one of
the most important methods and foundations for the existing financial
market in which the result is within the reasonable range.[10]
Since the market crash of 1987, it has been observed that market implied
volatility for options of lower strike prices are typically higher than for
higher strike prices, suggesting that volatility is stochastic, varying both for
time and for the price level of the underlying security. Stochastic volatility
models have been developed including one developed by S.L. Heston.[11]
One principal advantage of the Heston model is that it can be solved in
closed-form, while other stochastic volatility models require complex
numerical methods.[11]
Once a valuation model has been chosen, there are a number of different
techniques used to take the mathematical models to implement the models.
In some cases, one can take the mathematical model and using analytical
methods develop closed form solutions such as Black-Scholes and the Black
model. The resulting solutions are useful because they are rapid to calculate,
and their "Greeks" are easily obtained.
Closely following the derivation of Black and Scholes, John Cox, Stephen
Ross and Mark Rubinstein developed the original version of the binomial
options pricing model.[12] [13] It models the dynamics of the option's
theoretical value for discrete time intervals over the option's duration. The
model starts with a binomial tree of discrete future possible underlying stock
prices. By constructing a riskless portfolio of an option and stock (as in the
Black-Scholes model) a simple formula can be used to find the option price
at each node in the tree. This value can approximate the theoretical value
produced by Black Scholes, to the desired degree of precision. However, the
binomial model is considered more accurate than Black-Scholes because it is
more flexible, e.g. discrete future dividend payments can be modeled
correctly at the proper forward time steps, and American options can be
modeled as well as European ones. Binomial models are widely used by
professional option traders.
The equations used to model the option are often expressed as partial
differential equations (see for example Black–Scholes PDE). Once
expressed in this form, a finite difference model can be derived, and the
valuation obtained. This approach is useful for extensions of the option
pricing model, such as changing assumptions as to dividends, that are not
able to be represented with a closed form analytic solution. A number of
implementations of finite difference methods exist for option valuation,
including: explicit finite difference, implicit finite difference and the Crank-
Nicholson method. A trinomial tree option pricing model can be shown to be
a simplified application of the explicit finite difference method.
[edit] Risks
As with all securities, trading options entails the risk of the option's value
changing over time. However, unlike traditional securities, the return from
holding an option varies non-linearly with the value of the underlier and
other factors. Therefore, the risks associated with holding options are more
complicated to understand and predict.
In general, the change in the value of an option can be derived from Ito's
lemma as:
where the Greeks Δ, Γ, κ and θ are the standard hedge parameters calculated
from an option valuation model, such as Black-Scholes, and dS, dσ and dt
are unit changes in the underlier price, the underlier volatility and time,
respectively.
Thus, at any point in time, one can estimate the risk inherent in holding an
option by calculating its hedge parameters and then estimating the expected
change in the model inputs, dS, dσ and dt, provided the changes in these
values are small. This technique can be used effectively to understand and
manage the risks associated with standard options. For instance, by
offsetting a holding in an option with the quantity − Δ of shares in the
underlier, a trader can form a delta neutral portfolio that is hedged from loss
for small changes in the underlier price. The corresponding price sensitivity
formula for this portfolio Π is:
[edit] Example
Under this scenario, the value of the option increases by $0.0614 to $1.9514,
realizing a profit of $6.14. Note that for a delta neutral portfolio, where by
the trader had also sold 44 shares of XYZ stock as a hedge, the net loss
under the same scenario would be ($15.86).
A special situation called pin risk can arise when the underlier closes at or
very close to the option's strike value on the last day the option is traded
prior to expiration. The option writer (seller) may not know with certainty
whether or not the option will actually be exercised or be allowed to expire
worthless. Therefore, the option writer may end up with a large, unwanted
residual position in the underlier when the markets open on the next trading
day after expiration, regardless of their best efforts to avoid such a residual.
[edit] Trading
The most common way to trade options is via standardized options contracts
that are listed by various futures and options exchanges. [15] Listings and
prices are tracked and can be looked up by ticker symbol. By publishing
continuous, live markets for option prices, an exchange enables independent
parties to engage in price discovery and execute transactions. As an
intermediary to both sides of the transaction, the benefits the exchange
provides to the transaction include:
With few exceptions,[16] there are no secondary markets for employee stock
options. These must either be exercised by the original grantee or allowed to
expire worthless.
Swap (finance)
In finance, a swap is a derivative in which counterparties exchange certain
benefits of one party's financial instrument for those of the other party's
financial instrument. The benefits in question depend on the type of financial
instruments involved. For example, in the case of a swap involving two
bonds, the benefits in question can be the periodic interest (or coupon)
payments associated with the bonds. Specifically, the two counterparties
agree to exchange one stream of cash flows against another stream. These
streams are called the legs of the swap. The swap agreement defines the
dates when the cash flows are to be paid and the way they are calculated.[1]
Usually at the time when the contract is initiated at least one of these series
of cash flows is determined by a random or uncertain variable such as an
interest rate, foreign exchange rate, equity price or commodity price.[1]
The cash flows are calculated over a notional principal amount, which is
usually not exchanged between counterparties. Consequently, swaps can be
used to in cash or collateral.
Swaps can be used to hedge certain risks such as interest rate risk, or to
speculate on changes in the expected direction of underlying prices.
The first swaps were negotiated in the early 1980s.[1] David Swensen, a Yale
Ph.D. at Salomon Brothers, engineered the first swap transaction according
to "When Genius Failed: The Rise and Fall of Long-Term Capital
Management" by Roger Lowenstein. Today, swaps are among the most
heavily traded financial contracts in the world: the total amount of interest
rates and currency swaps outstanding is more thаn $426.7 trillion in 2009,
according to International Swaps and Derivatives Association.
Swap market
Types of swaps
The most common type of swap is a “plain Vanilla” interest rate swap. It is
the exchange of a fixed rate loan to a floating rate loan. The life of the swap
can range from 2 years to over 15 years. The reason for this exchange is to
take benefit from comparative advantage. Some companies may have
comparative advantage in fixed rate markets while other companies have a
comparative advantage in floating rate markets. When companies want to
borrow they look for cheap borrowing i.e. from the market where they have
comparative advantage. However this may lead to a company borrowing
fixed when it wants floating or borrowing floating when it wants fixed. This
is where a swap comes in. A swap has the effect of transforming a fixed rate
loan into a floating rate loan or vice versa.
An equity swap is a special type of total return swap, where the underlying
asset is a stock, a basket of stocks, or a stock index. Compared to actually
owning the stock, in this case you do not have to pay anything up front, but
you do not have any voting or other rights that stock holders do have.
A credit default swap (CDS) is a swap contract in which the buyer of the
CDS makes a series of payments to the seller and, in exchange, receives a
payoff if a credit instrument - typically a bond or loan - goes into default
(fails to pay). Less commonly, the credit event that triggers the payoff can be
a company undergoing restructuring, bankruptcy or even just having its
credit rating downgraded. CDS contracts have been compared with
insurance, because the buyer pays a premium and, in return, receives a sum
of money if one of the events specified in the contract occur. Unlike an
actual insurance contract the buyer is allowed to profit from the contract and
may also cover an asset to which the buyer has no direct exposure.
There are myriad different variations on the vanilla swap structure, which
are limited only by the imagination of financial engineers and the desire of
corporate treasurers and fund managers for exotic structures.[1]
• A total return swap is a swap in which party A pays the total return
of an asset, and party B makes periodic interest payments. The total
return is the capital gain or loss, plus any interest or dividend
payments. Note that if the total return is negative, then party A
receives this amount from party B. The parties have exposure to the
return of the underlying stock or index, without having to hold the
underlying assets. The profit or loss of party B is the same for him as
actually owning the underlying asset.
• An option on a swap is called a swaption. These provide one party
with the right but not the obligation at a future time to enter into a
swap.
• A variance swap is an over-the-counter instrument that allows one to
speculate on or hedge risks associated with the magnitude of
movement, a CMS, is a swap that allows the purchaser to fix the
duration of received flows on a swap.
• An Amortising swap is usually an interest rate swap in which the
notional principal for the interest payments declines during the life of
the swap, perhaps at a rate tied to the prepayment of a mortgage or to
an interest rate benchmark such as the LIBOR.
[edit] Valuation
Further information: Rational pricing#Swaps and Arbitrage
The value of a swap is the net present value (NPV) of all estimated future
cash flows. A swap is worth zero when it is first initiated, however after this
time its value may become positive or negative.[1] There are two ways to
value swaps: in terms of bond prices, or as a portfolio of forward contracts.[1]
From the point of view of the fixed-rate payer, the swap can be viewed as
having the opposite positions. That is,
1. assume the position with the lower present value of payments, and
borrow funds equal to this present value
2. meet the cash flow obligations on the position by using the borrowed
funds, and receive the corresponding payments - which have a higher
present value
3. use the received payments to repay the debt on the borrowed funds
4. pocket the difference - where the difference between the present value
of the loan and the present value of the inflows is the arbitrage profit.
Subsequently, once traded, the price of the Swap must equate to the price of
the various corresponding instruments as mentioned above. Where this is not
true, an arbitrageur could similarly short sell the overpriced instrument, and
use the proceeds to purchase the correctly priced instrument, pocket the
difference, and then use payments generated to service the instrument which
he is short.
What is an Option?
Options Basics - Part One
• Equity Options
• Calls and Puts
• Options Premium
• Expiration Friday
• Exercise
• Assignment
• Net Price
• Early Exercise
• Volatility
Tools
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An option is a contract to buy or sell a specific financial product officially known as the
option's underlying instrument or underlying interest. For equity options, the underlying
instrument is a stock, exchange-traded fund (ETF), or similar product. The contract itself
is very precise. It establishes a specific price, called the strike price, at which the contract
may be exercised, or acted on. And it has an expiration date. When an option expires, it
no longer has value and no longer exists.
Options come in two varieties, calls and puts, and you can buy or sell either type. You
make those choices - whether to buy or sell and whether to choose a call or a put - based
on what you want to achieve as an options investor.
If you buy a call, you have the right to buy the underlying instrument at the strike price
on or before the expiration date. If you buy a put, you have the right to sell the underlying
instrument on or before expiration. In either case, as the option holder, you also have the
right to sell the option to another buyer during its term or to let it expire worthless.
The situation is different if you write, or "sell to open", an option. Selling to open a short
option position obligates you, the writer, to fulfill your side of the contract if the holder
wishes to exercise. When you sell a call as an opening transaction, you're obligated to sell
the underlying interest at the strike price, if you're assigned. When you sell a put as an
opening transaction, you're obligated to buy the underlying interest, if assigned. As a
writer, you have no control over whether or not a contract is exercised, and you need to
recognize that exercise is always possible at any time until the expiration date. But just as
the buyer can sell an option back into the market rather than exercising it, as a writer you
can purchase an offsetting contract, provided you have not been assigned, and end your
obligation to meet the terms of the contract. When offsetting a short option position, you
would enter a "buy to close" transaction.
At a Premium
When you buy an option, the purchase price is called the premium. If you sell, the
premium is the amount you receive. The premium isn't fixed and changes constantly - so
the premium you pay today is likely to be higher or lower than the premium yesterday or
tomorrow. What those changing prices reflect is the give and take between what buyers
are willing to pay and what sellers are willing to accept for the option. The point at which
there's agreement becomes the price for that transaction, and then the process begins
again.
If you buy options, you start out with what's known as a net debit. That means you've
spent money you might never recover if you don't sell your option at a profit or exercise
it. And if you do make money on a transaction, you must subtract the cost of the premium
from any income you realize to find your net profit.
As a seller, on the other hand, you begin with a net credit because you collect the
premium. If the option is never exercised, you keep the money. If the option is exercised,
you still get to keep the premium, but are obligated to buy or sell the underlying stock if
you're assigned.
What a particular options contract is worth to a buyer or seller is measured by how likely
it is to meet their expectations. In the language of options, that's determined by whether
or not the option is, or is likely to be, in-the-money or out-of-the-money at expiration. A
call option is in-the-money if the current market value of the underlying stock is above
the exercise price of the option, and out-of-the-money if the stock is below the exercise
price. A put option is in-the-money if the current market value of the underlying stock is
below the exercise price and out-of-the-money if it is above it. If an option is not in-the-
money at expiration, the option is assumed to be worthless.
An option's premium has two parts: an intrinsic value and a time value. Intrinsic value is
the amount by which the option is in-the-money. Time value is the difference between
whatever the intrinsic value is and what the premium is. The longer the amount of time
for market conditions to work to your benefit, the greater the time value.
Options Prices
Several factors, including supply and demand in the market where the option is traded,
affect the price of an option, as is the case with an individual stock. What's happening in
the overall investment markets and the economy at large are two of the broad influences.
The identity of the underlying instrument, how it traditionally behaves, and what it is
doing at the moment are more specific ones. Its volatility is also an important factor, as
investors attempt to gauge how likely it is that an option will move in-the-money.
OPTION PRICING MODEL
The first widely-used model for option pricing is the Black Scholes.
This formula can be used to calculate a theoretical value for an option
using current stock prices, expected dividends, the option's strike
price, expected interest rates, time to expiration and expected stock
volatility. ...
The Black-Scholes model and the Cox, Ross and Rubinstein binomial model
are the primary pricing models used by the software available from this site
(Finance Add-in for Excel, the Options Strategy Evaluation Tool, and the
on-line pricing calculators.)
Both models are based on the same theoretical foundations and assumptions
(such as the geometric Brownian motion theory of stock price behaviour and
risk-neutral valuation). However, there are also some some important
differences between the two models and these are highlighted below.
Where:
S = stock price
X = strike price
t = time remaining until expiration, expressed as a percent of a year
r = current continuously compounded risk-free interest rate
v = annual volatility of stock price (the standard deviation of the short-term
returns over one year). See below for how to estimate volatility.
ln = natural logarithm
N(x) = standard normal cumulative distribution function
e = the exponential function
The Excel add-in which can be downloaded from this site contains three sets
of tools for dealing with non-lognormally distributed asset prices and the
volatility smile:
In addition to using the add-in you can use the on-line stock price
distribution calculator to examine the sensitivity of the shape of the
lognormal stock price distribution curve to changes in time, volatility, and
expected growth rates. And you can also use the on-line stock price
probability calculator to look at the probabilities of stock prices exceeding
upper and lower boundary prices -- both at the end of a specified number of
days and at any time during the period.
This is the most critical parameter for option pricing -- option prices are very
sensitive to changes in volatility. Volatility however cannot be directly
observed and must be estimated.
Whilst implied volatility -- the volatility of the option implied by current
market prices -- is commonly used the argument that this is the "best"
estimate is somewhat circular. Skilled options traders will not rely solely on
implied volatility but will look behind the estimates to see whether or not
they are higher or lower than you would expect from historical and current
volatilities, and hence whether options are more expensive or cheaper than
perhaps they should be.
It's a slight over simplification, but basically implied volatility will give you
the price of an option; historical volatility will give you an indication of its
value. It's important to understand both. For instance, if your forecast of
volatility based on historical prices is greater than current implied volatility
(options under valued) you might want to buy a straddle; if your historical
forecast is less than implied volatility you might want to sell a straddle.
This site contains one of the most comprehensive sets of tools available for
getting a handle on volatility. The tools include an Historic Volatility
Calculator (which automatically extracts historic prices from the web, and
calculates and graphs volatility), an Implied Volatility Calculator (which
retrieves and calculates implied volatility for an entire option chain), and an
Excel Add-in (for those who like to build their own Excel applications). The
volatility functions in the add-in include:
Volatility forecasting using the GARCH model, which lets you see how
volatility is likely to move in the future. A common application of this is
to create volatility term structures for the weeks or months ahead to
answer questions like "what volatility should I use for pricing an option
with a life of three months?".
The implied volatility, historical volatility, and forecast volatility tools are
complementary. With volatility being such a critical factor a good options
trader will use all three sets of tools to help form a view about the volatility
to use in pricing options.
See the Finance Add-in for Excel and Volatility FAQs pages, Historic
Volatility Calculator page, Implied Volatility Calculator page, and the on-
line demos for more information.
Unlike volatility, which is all important for determining the fair value of an
option, views about the future direction of an underlying asset (ie whether
you think it will go up or down in the future and by how much) are
completely irrelevant.
Thus, while any two investors may strongly disagree on the rate of return
they expect on a stock they will, given agreement to the assumptions of
volatility and the risk free rate, always agree on the fair value of the option
on that underlying asset.
The fact that a prediction of the future price of the underlying asset is not
necessary to value an option may appear to be counter intuitive, but it can
easily be shown to be correct. Dynamically hedging a call using underlying
asset prices generated from Monte Carlo simulation is a particularly
convincing way of demonstrating this. Irrespective of the assumptions
regarding stock price growth built into the Monte Carlo simulation the cost
of hedging a call (ie dynamically maintaining a delta neutral position by
buying & selling the underlying asset) will always be the same, and will be
very close to the Black-Scholes value. (The Excel add-in available from this
site contains a Monte Carlo simulation component which can be used for
this purpose.)
Putting it another way, whether the stock price rises or falls after, eg, writing
a call, it will always cost the same (providing volatility remains constant) to
dynamically hedge the call and this cost, when discounted back to present
value at the risk free rate, is very close to the Black-Scholes value.
This key concept underlying the valuation of all derivatives -- that fact that
the price of an option is independent of the risk preferences of investors -- is
called risk-neutral valuation. It means that all derivatives can be valued by
assuming that the return from their underlying assets is the risk free rate.
As all exchange traded equity options have American-style exercise (ie they
can be exercised at any time as opposed to European options which can only
be exercised at expiration) this is a significant limitation.
The binomial model breaks down the time to expiration into potentially a
very large number of time intervals, or steps. A tree of stock prices is
initially produced working forward from the present to expiration. At each
step it is assumed that the stock price will move up or down by an amount
calculated using volatility and time to expiration. This produces a binomial
distribution, or recombining tree, of underlying stock prices. The tree
represents all the possible paths that the stock price could take during the life
of the option.
At the end of the tree -- ie at expiration of the option -- all the terminal
option prices for each of the final possible stock prices are known as they
simply equal their intrinsic values.
Next the option prices at each step of the tree are calculated working back
from expiration to the present. The option prices at each step are used to
derive the option prices at the next step of the tree using risk neutral
valuation based on the probabilities of the stock prices moving up or down,
the risk free rate and the time interval of each step. Any adjustments to
stock prices (at an ex-dividend date) or option prices (as a result of early
exercise of American options) are worked into the calculations at the
required point in time. At the top of the tree you are left with one option
price.
To get a feel for how the binomial model works you can use the on-line
binomial tree calculators: either using the original Cox, Ross, & Rubinstein
tree or the equal probabilities tree, which produces equally accurate results
while overcoming some of the limitations of the C-R-R model. The
calculators let you calculate European or American option prices and display
graphically the tree structure used in the calculation. Dividends can be
specified as being discrete or as an annual yield, and points at which early
exercise is assumed for American options are highlighted.
Advantage: The big advantage the binomial model has over the Black-
Scholes model is that it can be used to accurately price American options.
This is because with the binomial model it's possible to check at every point
in an option's life (ie at every step of the binomial tree) for the possibility of
early exercise (eg where, due to eg a dividend, or a put being deeply in the
money the option price at that point is less than its intrinsic value).
Where an early exercise point is found it is assumed that the option holder
would elect to exercise, and the option price can be adjusted to equal the
intrinsic value at that point. This then flows into the calculations higher up
the tree and so on.
The on-line binomial tree graphical option calculator highlights those points
in the tree structure where early exercise would have have caused an
American price to differ from a European price.
Limitation: The main limitation of the binomial model is its relatively slow
speed. It's great for half a dozen calculations at a time but even with today's
fastest PCs it's not a practical solution for the calculation of thousands of
prices in a few seconds.
The same underlying assumptions regarding stock prices underpin both the
binomial and Black-Scholes models: that stock prices follow a stochastic
process described by geometric brownian motion. As a result, for European
options, the binomial model converges on the Black-Scholes formula as the
number of binomial calculation steps increases. In fact the Black-Scholes
model for European options is really a special case of the binomial model
where the number of binomial steps is infinite. In other words, the binomial
model provides discrete approximations to the continuous process
underlying the Black-Scholes model.
Whilst the Cox, Ross & Rubinstein binomial model and the Black-Scholes
model ultimately converge as the number of time steps gets infinitely large
and the length of each step gets infinitesimally small this convergence,
except for at-the-money options, is anything but smooth or uniform. To
examine the way in which the two models converge see the on-line Black-
Scholes/Binomial convergence analysis calculator. This lets you examine
graphically how convergence changes as the number of steps in the binomial
calculation increases as well as the impact on convergence of changes to the
strike price, stock price, time to expiration, volatility and risk free interest
rate.
Roll, Geske and Whaley analytic solution: The RGW formula can be
used for pricing an American call on a stock paying discrete dividends.
Because it is an analytic solution it is relatively fast.
The Delta
A by-product of the Black-Scholes model is the calculation of the delta: the
degree to which an option price will move given a small change in the
underlying stock price. For example, an option with a delta of 0.5 will move
half a cent for every full cent movement in the underlying stock.
Call deltas are positive; put deltas are negative, reflecting the fact that the
put option price and the underlying stock price are inversely related. The
put delta equals the call delta - 1.
The delta is often called the hedge ratio: If you have a portfolio short n
options (eg you have written n calls) then n multiplied by the delta gives you
the number of shares (ie units of the underlying) you would need to create a
riskless position - ie a portfolio which would be worth the same whether the
stock price rose by a very small amount or fell by a very small amount. In
such a "delta neutral" portfolio any gain in the value of the shares held due
to a rise in the share price would be exactly offset by a loss on the value of
the calls written, and vice versa.
Note that as the delta changes with the stock price and time to expiration the
number of shares would need to be continually adjusted to maintain the
hedge. How quickly the delta changes with the stock price is given by
gamma (see "Greeks" below).
The Options Strategy Evaluation Tool, which can be downloaded from this
site, calculates and displays the delta for each individual option trade entered
into the tool. If you set up a covered call in the Options Strategy Evaluation
Tool using Black-Scholes European pricing (ie sell n calls and buy n
underlying shares) then change the number of shares bought to be equal to
the number of options multiplied by the delta you will have an example of a
hedged position. Notice how the time line (ie the curved line showing the
profit at the number of days to expiration) on the payoff diagram just
touches (but doesn't pass through) the horizontal axis at one point only: the
point equal to the current share price. Moving a short distance in either
direction on this line will have the same impact on profit. ie you are delta
hedged.
The Options Strategy Evaluation Tool also calculates the position delta for a
range of stock prices and days to expiration -- that is, the delta of the entire
strategy consisting of multiple option trades and trades in the underlying
stock. The position delta, sometimes called the Equivalent Stock Position
(ESP) lets you see, for example, how a dollar rise in the underlying stock
prices will affect the overall profitability of the entire strategy. For example,
if the ESP of a portfolio, or strategy, is -2,300 it means that the market
exposure of the portfolio is equivalent to a portfolio short 2,300 shares. Thus
a one dollar rise in the stock price will cause the profitability of the entire
position to fall by $2,300.
The other position "Greeks" are also calculated by the model as well -- see
below.
You can also see how the delta changes with stock price, volatility, time to
expiration and interest rate by using the on-line options calculator.