Energy options - practical application

GLOBAL LEADER IN ENERGY MARKET EDUCATION IN COOPERATION WITH
© ENTRIMA info@entrima.org 1 - 6
ENERGY OPTIONS – PRACTICAL APPLICATION
MARKET RISK MANAGEMENT & TRADING
“In a two- dimensional approach (i.e. looking at P&L distribution of options at
expiry) most of the Greeks are disregarded, while during the lifetime of an option
they can make or break a strategy. Many people understand losses deriving from
bad investment decisions when buying options or the potentially unlimited losses
when selling options. However, quite often, they fail to see the possible devastating
effects of misinterpretation of the Greeks or not knowing them at all”
- Pierino Ursone, How to Calculate Options Prices and Their Greeks (2015).
TARGET GROUP WHO SHOULD ATTEND?
This course is very suitable for:
 Traders, Options traders, Analysts, Structurers
 Staff of Exchanges, Clearing organisations and Brokerage firms
 People employed in the Derivatives Sales & Marketing division
 Staff of Treasury, Risk Management and Mid & Back Office departments
 Asset and Portfolio Managers
 Anyone who needs a knowledge of Options in the course of his work
WORLD-CLASS KNOWLEDGE CENTRE

TUTOR PIERINO URSONE
This programme is led by Pierino Ursone. He has been a professional options
trader for twenty years. From 1992 to 2001 he has been active in equity
options trading, in 2001 he entered the energy business, trading: power, gas,
coal, oil & carbon options. In 2015 he has published a book on options
trading: How to Calculate Options Prices and Their Greeks (Wiley & Sons, Wiley
Finance Series). Recently the book has been ranked # 4 in the global options
literature among authors like: Nassim Taleb, John Hull, Sheldon Natenberg &
Lawrence McMillan.
FURTHER DETAILS WHEN? WHERE? PRICE?
This 2-day programme is held on November 7th
plus 8th
2016 in Amsterdam.
Venue is Entrima’s office: The Euronext building (former exchange trading
floor), at Beursplein 5.
The price for this 2-day course is 1,700 euro (ex vat, if applicable).
Subscription by email: info@entrima.org
WORLD-CLASS KNOWLEDGE CENTRE

PROGRAMME TOPICS & THEMES
The content of this 2-day course is as follows:
 Introduction
 The Normal Probability Distribution
o Standard deviation in a financial market
o The impact of volatility and time on the standard deviation
o Volatility
o The probability distribution of the value of a Future after 1 year
o Normal distribution versus lognormal distribution
o Calculating the annualised volatility traditionally
o Calculating the annualised volatility without μ
o Calculating the annualised volatility applying the 16% rule
o Variation in trading days
o Approach towards intraday volatility
o Historical versus implied volatility
 Put Call parity
o Synthetically creating a Future long position, the reversal
o Synthetically creating a Future short position, the conversion
o Synthetic options
o Covered call writing
o Short note on interest rate
 Delta
o Change of option value through the delta
o Dynamic delta
o Delta at different maturities
o Delta at different volatilities
o 20-80 Delta region
o Delta per strike
o Dynamic delta hedging
o The at the money delta
o Delta changes in time

ega of at the money options compared to time too Vega of at the money options compared to maturity
o Vega of at the money options compared to the underlying level
o Vega on a 3 dimensional scale, vega vs maturity and vega vs
volatility
o Determining the boundaries of vega
o Comparing the Boundaries of vega with the boundaries of
gamma
o Determining vega values of out of the money options
o Derivatives of the vega
o Vomma
 Theta
o A practical example
o Theta in relation to volatility
o Theta in relation to maturity
o Theta of at the money options in relation to the underlying level
o Determining the boundaries of theta
o The gamma theta relationship, α
o Theta on a 3 dimensional scale, theta vs maturity and theta vs
volatility
o Determining the theta value of an at the money straddle
o Determining theta values of out of the money options
 The Greeks Revisited
 Skew
o Volatility smiles with different times to maturity
o Sticky at the money volatility
 Spreads
o Call spread (horizontal)
o Put spread (horizontal)
o Boxes
o Applying boxes in the real market
o The greeks for horizontal spreads
o Delta
 Pricing
o Calculating at the money straddle using Black & Scholes model
o Determining the value of an at the money straddle
 Delta II
o Determining the boundaries of the delta
o Valuation of the at the money delta
o Delta distribution in relation to the at the money straddle
o Application of delta approach, determining delta of a call spread
 Gamma
o The aggregate gamma for a portfolio of options
o The delta change of an option
o The gamma is not a constant
o Long term gamma example
o Short term gamma example
o Very short term gamma example
o Determining the boundaries of gamma
o Determining the gamma value of an at the money straddle
o Gamma related to time2maturity, volatility & the underlying level
o Practical example
o Hedging the gamma
o Determining the gamma of out of the money options
o Derivatives of the gamma
 Vega
o Different maturities will display diff. volatility regime changes
o Determining the vega value of at the money options
o Vega of at the money options compared to volatility
o Gamma
o Vega
o Theta
o Time spread
o Approximation of the value of at the money spreads
o Ratio spread

o Gamma
 Butterfly
o Put Call parity
o Distribution of the butterfly
o Boundaries of the butterfly
o Method for estimating at the money butterfly values
o Estimating out of the money butterfly values
o Butterfly in relation to volatility
o Butterfly in relation to time to maturity
o Butterfly as a strategical play
o The greeks of a butterfly
o Delta
o Gamma
o Vega
o Theta
o Straddle – Strangle or the “Iron fly”
 Strategies
o Call
o Put
o Call spread
o Ratio spread
o Straddle
o Strangle
o Collar (Risk reversal, Fence)
o Gamma portfolio
o Gamma hedging strategies based on Monte Carlo scenarios
o Setting up a gamma position on the back of prevailing kurtosis
o Excess kurtosis
o Benefitting from a platykurtic environment
o The mesokurtic market
o The leptokurtic market
o Transition from a platykurtic environment towards a leptokurtic
environment

o Benefitting from a platykurtic environment
o Wrong hedging strategy: Killergamma
o Vega convexity/ Vgamma
o Vgamma in relation to time
 Trading Simulations
o Trading simulations are the best way to transpose the theoretical
knowledge into a practical application
o Based on Monte Carlo Simulations several strategies will be
discussed in terms of P&L evolution, critical risk levels and the
development of the Greeks.
o The simulations will be excel based
ENTRIMA FOR PROFESSIONALS

Energy options - practical application

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