Options pricing – a little deeper

Getting a bit mathematical now. When pricing an option, we are attempting to put a value on the probability of future price movements. So we are now terribly interested in the mean and standard deviation of an underlyings price movements. The mean is the average price movement, whilst the standard deviation tells us how far the price moved. Using these figures (& volatility which is a measure of how fast the price is expected to move), we can model the distribution of expected price movements. Of course, expected is not the same thing as actual; which always makes things a …

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Devise and Cancan

Been using devise for a number of projects, happy with the authentication process. Cancan (thanks Ryan Bates) allows role based permission management. Once you understand how things work together, it’s quite easy to setup and test. Found these blog posts helpful. http://www.tonyamoyal.com/2010/07/28/rails-authentication-with-devise-and-cancan-customizing-devise-controllers/comment-page-1/#comments http://www.tonyamoyal.com/2010/09/29/rails-authentication-with-devise-and-cancan-part-2-restful-resources-for-administrators/ There are a few gaps though, that are filled in here. http://stackoverflow.com/questions/5739419/checkboxes-are-getting-but-not-putting-many-to-many-roles  

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Valuing an option

For a simple options pricing model, the following values are needed. Exercise price Time to expiration Price of underlying Interest rates Dividends Volatility ­­ 1. Exercise price Price at which the underlying can be bought (call) or sold (put). For example for an AAPL 120 strike June contract, means the buyer can purchase 100 share of AAPL for $120 per share, up and until June expiry date. 2. Time to expiration Every option, traded on an options exchange, has an expiry date. Time to expiration is the number of days until that expiry date. 3. Price of underlying Price of the …

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Basic Option Trading Strategies

Two basic trading strategies for Options – Speculation & Insurance/Hedging. Remember the characteristics of an option. Buying a call or put option contract over a stock, gives you the right to buy (call) or sell (put) 100 shares of the underlying stock, at a certain price, on or before a set date in the future. Speculation So if you believe that a stock will rise in the future, instead of purchasing the stock, you can purchase a call option (I prefer long term options for this strategy). Why do this? Let’s walk through an example. Say AAPL is trading at …

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HTML5 sockets

Seems with html 5 websockets I can now think of the browser as a unix terminal. Instead of serving out flat html files, I can serve out one small bit of javascript that builds the page synchronously & interacts with the user. All good for very fast dynamic web pages, and a great user experience. Not so good for getting my content in Google’s index. Time to think.  

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Options premium

When you look at the premium for an option (how much it is trading at now), you should break the price up into two components. Intrinsic value and Time value. Intrinsic value is what the option would be worth if it had to be executed now. If the option is In The Money, then it will have an Intrinsic value. If the option is Out of the Money, it will not have an intrinsic value, only Time Value. Time value is what option buyers are prepared to pay for the option, over and above any Intrinsic value. They may pay …

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Started coding Turtle trading routine

The Turtle Trading system as taught by Richard Dennis supposedly returns an 80% annualized return. Well.. that sounds interesting & worth testing. I’ve build a simple database of historical stock prices using yahoo finance. Let’s see how this goes. Update – July 2011: Could not get profitable backtesting so canned automated project. However profitable in real trading (about +20% pa) using pretty much the same system, seems “human feel” actually plays a big part, for me at any rate.

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