The 47-Page Ultimate Guide to Options Pricing Theory (PDF)

Learn the theory (and math) behind options pricing.

This 47-page ultimate guide teaches you everything you need to understand how options are priced.

Trying to decide if the guide is right for you?

Who, specifically, is this guide for?

The Ultimate Guide is for practitioners and academics who want to understand the theory and math behind options pricing. If you have an understanding of options - or want to learn the theory behind options - and are familiar with college-level calculus, this guide is for you.

Who should NOT buy this guide?

If you are a professional options trader, a professional quantitative developer working at a hedge fund, or a professor teaching financial math, this guide is probably not for you.

This guide is focused on the foundations of options theory, the math behind the pricing models, and how different options models are built. There is no code included in the guide, it's all theory and math.

What You'll Learn Inside the Ultimate Guide

• Terms and Definitions
• Profit Equations
• Some Trading Strategies
• Simple Boundary Conditions for Call Options
• Simple Boundary Conditions for Put Options
• The Three Stories of Option Pricing Theory
• Tighter Boundary Conditions
• The Third Story of Option Pricing Theory
• One-Period Binomial Lattice
• Two-Period Binomial Lattice
• Binomial Lattice in World of Black-Scholes-Merton
• Binomial Lattice Beyond World of Black-Scholes-Merton
• Comparisons of Option Values
• A Little Option Pricing History
• A Model of the Behavior of Stock Prices
• The Black-Scholes-Merton Differential Equation
• The Black-Scholes-Merton Option Pricing Formula
• Black-Scholes-Merton vs. Binomial Lattice
• General Black-Scholes-Merton Option Pricing Formula
• Assumptions Regarding Volatility
• The Option “Greeks”

FAQs

What problems will the Ultimate Guide help me overcome?

If you trade options, you should have an idea of the pricing strategies traders and quants use. The theory helps identify mispricings and design your own derivative contracts if you become a quant.

What do you mean theory?

The guide talks about things like boundary conditions, no arbitrage assumptions, risk neutral measures and other completely impractical things. Though it's impractical, it's what makes up the math behind options pricing.

What level of math should I know?

The value of a call option under Black-Scholes is the result of differentiating stochastic differential equations. You should have a college-level understand of calculus to understand how the Black-Scholes model is derived.

Does the Ultimate Guide come with Python code?

No. If you want the code, check out The 46-Page Ultimate Guide to Pricing Options and Implied Volatility With Python (PDF + code).

Where did you learn this?

I got a Master of Science in Quantitative Finance from the Illinois Institute of Technology. You lean all the theory behind derivatives. This guide is a compilation of notes, references from other books, and some practical experience.