Equities Flashcards
(24 cards)
Types of Equity Desk
Delta One, Equity Structuring, cash equities, equity derivatives, convertible bond trading.
Future of Equities
There is a falling headcount, and compensation.
Delta One
Focuses on trading financial instruments that have a delta of one, meaning they closely track the price movements of an underlying asset.
This typically involves trading in derivatives such as exchange-traded funds (ETFs), futures, and swaps to replicate the performance of the underlying asset or index.
The primary objective of a Delta One desk is often to hedge risk, facilitate arbitrage opportunities, or execute trading strategies for clients.
Equity Derivatives
Financial instruments whose value is based on the price movements of stocks or stock indices. They derive their value from the performance of underlying equities, allowing investors to speculate on or hedge against price fluctuations without owning the underlying assets directly.
Equity structuring requirements
More technical people. Coding required.
These desks still pay handsomely, allow for significant risk to be managed, and involve a leveraging of technology as opposed to one’s role being diminished by technology.
Attributes of Cash Equities and Delta One desk.
For example, many cash equities and Delta One desks will involve most everyone being more similar to sales traders. Trading aspects are heavily automated due to the shear liquidity.
What are the two basic types of options (in the equity derivative context)?
Call options gives the holder the right to buy an underlying asset by a certain date at a fixed price.
A put option conveys the right to sell an underlying asset by a certain date at a fixed price.
The most money the buyer of an option can ever lose on the deal is the initial premium paid for the contract.
Option Premium
Paid to the dealer who writes the option (small fee).
What’s the real price of option?
Intrinsic value + time value.
Long Call option
Buy a call option and profit from rise in the value of the underlying asset. Long call has limited downside risk, but unlimited upside.
If price of asset rises you can get it at the cheaper price.
Sell Short Call Contract
Sell a call contract. For example, the premium ($10) cost of option is most you can make, and you have unlimited downside.
You benefit from premiums if the price goes down because the buyer won’t exercise his right to purchase. (the new market price will be cheaper than the old).
Spot price
Current Market Price for for immediate delivery
Strike Price
Price at which a options contract can be exercised, and the price at which the underlying asset will be bought or sold.
What is a naked short option?
Unhedged short option. Usually you hedge with offsetting option positions, or by purchasing the underlying asset.
What is a long put? What is the max loss on a long put.
You sell the right to sell hoping that the price stays above the strike price so the option is not exercised. If the price falls below it you would be forced to buy at the strike price (which would be higher than the market rate)
Difference between long put and short?
A short put can generate income for the seller, but it also comes with the obligation to buy the underlying asset if the option is exercised.
A long put, on the other hand, gives the holder the right to sell the underlying asset at the strike price, but it comes with the cost of the premium paid upfront.
Short Put
Selling the right to sell at the strike price. You are hoping the market price stays above the strike price so that the option is not exercised. It its exercise you would be forced to buy at a strike price that is higher than the market rate.
Profit capped at premiums. Loss unlimted.
How does shorting put/call options earn?
From the premiums.
How does longing put/call options earn?
Limited downside of premiums. High upside if prices change drastically.
Covered Call
An options trading strategy where an investor who owns the underlying asset (such as stocks or ETFs) simultaneously sells call options on that same asset.
The call options sold are “covered” because the investor already owns the underlying asset, providing them with the ability to fulfill the obligation of the call option if exercised.
Make premium plus stock appreciation until point where call gets ITM (above strike price) then start losing money on call while making money on the shares held. (as long as it stays below strike price) (assume current price is 50, Strike Price is 55)
Collar Strategy
A collar strategy in trading involves simultaneously buying a protective put option while selling a covered call option on an underlying asset.
Limits both potential gains and losses, providing a range within which the asset’s price can fluctuate while offering downside protection and generating income from the call option premium.
It’s often used by investors seeking to hedge against downside risk while still participating in potential upside movements.
If the strikes of the put and call are set at the right levels the premiums of the two cancel out and the strategy is a zero-cost collar.
Equity Collar.
Buy protective put and sell a call on the share with the same expiry data. Will receive premium on the call to fund cost of the put.
This strategy is used by investors seeking to protect their equity holdings from significant downturns while still generating some income and participating in moderate upside movements.
