Lecture 1 Unit Preview Stock Trak Trading PDF

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lecturer: Binh do...

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BFC3340– Lecture1 UNITPREVIEWANDDERIVATIVESTRADINGONSTOCKTRAK BINHDO

Lectureoutline UnitPreview MATLAB StockTrak TradingAssignment

Staffdetails CE/Lecturer:DrBinhDo Email:[email protected] Mobile:0431486594 Consultation:Thursday1‐2pmviaZoom(clickonlinkintheconsultationscheduleinMoodle) Tutors: MichaelCiaravolo – Consultation:Wed12:30‐3pm;Thursday10‐11amviaZoom  DrIainMaclachlan – ConsultationTBC

Aboutthisunit Advancedderivativescourse

ExtendsyourunderstandingofbasicderivativesconceptslearnedinDerivatives1 Coversnewandadvancedtopics(stochasticcalculus,numericalmethods,creditderivativesetc)

Technicalnatureoftheunitisbalancedbypracticalapplication:derivativestradingandMATLAB programming

Teachingandlearningapproach Lecturesaredeliveredviaonlinerecordings TutorialsareonlineviaZoomforweeks1‐3.Theformatforweeks4‐12istobeconfirmedbytheUniversity. Largertutorialswillbesupportedbyanassistanttutorwhowillrespondtoquestionssenttothechatroom Forsmallertutorials,pleasefeelfreetosendquestionstothechatroom.Thetutorwillrespondduringorafter thetutorial

Despitethepandemiccircumstances,Icontinuetoexpecthighstandardoflearningfromstudentsandwill ensuresupportisavailabletoassistyourlearning.

Communication Weanswerqueriesaboutlectures/tutorials/assignmentsinMoodlediscussionforums.Trynot toemailusquestionsunlesstheyarerelatedtoyourowncircumstances.

Soifyouhaveaquery,firstcheckifithasbeenansweredbyusingSearchforums.Ifnot,create anewdiscussionwithyourquery.Wewilltrytoanswerthere.

Ifyouthinkyouknowtheanswerfeelfreetorespond.Theteachingstaffwilljumpinif necessary.

Textbooks Prescribedtext:Hull,OptionsFuturesandOtherDerivatives,9th Edition,Pearson The10th editionisavailablebuttooexpensive– notrequired eBookversionmaybeavailable,veryeconomicaloption.

Supplementarytext:Sundaram andDas,Derivatives:PrinciplesandPractice,2nd Edition McGraw‐Hill

MATLAB Inthisunit,youhaveachoice oflearningMATLAB soyoucanturntheoryintopracticebyimplementing conceptsandmodelsinMATLAB

PriorexperienceinMATLABnotnecessary Selfstudybycompleting2modulesIprovidedinMoodle IdemonstrateMATLABinthelecturesonWienerprocessesandNumericalmethods Notassessable.However,youmaywanttouseMATLAB inyourassignment.

MATLAB WhatisMATLAB? Itisahigh‐levellanguagefornumericalcomputation,visualisationandprogramming All‐purposegiantcalculator Iuseitforresearch,teaching,marking,personalinvestment,taxreturns….

WhyMATLAB? Verypowerfulyeteasytolearn ComewithtoolboxesrelevanttothiscoursesuchasFinancialInstrumentsToolbox AsMonashstudent,youcanhaveitinstalledinyourpersonalcomputer(nextslide) Usedbymanyquantsandresearchers Somethingforyoutoaddtoyourresume.

SelflearningMATLAB MATLABisnothardtolearnespeciallyforyouascommercestudents InstallMATLABinyourPCat:https://www.monash.edu/esolutions/software/catalogue Complete2modulesinpdffile“LearningMATLAB”(underfolderMATLABinMoodle) Wearehappytoprovidefurthersupportduringourweeklyconsultation Forthosewhochoosetodothis,IdonotexpectyoutobecomeaMATLABexpertafterdoing thiscoursebutIexpectyoutoknowhowMATLABworksandhowtowritefunctionsandscripts toperformcalculationsthatariseinthisuniteg pricingoptions.

Assessment Assessmenttask

Value Duedate

Post‐lecturequizzes

10%

1dayfollowingtherelevantlecture

Individualassignment 20%

5pm16October2020

Tradingassignment

10%

Midnight30October2020

Finalexam

60%

AsperUniversityexamschedule

Moodlequizzes Thereare12weeklyquizzes,4questionseach.Coveringcontentforthatweek. 10 minutes, 1 attempt Opened prior to the relevant lecture,closed 24hoursafterthelecture Eachquizisworth1mark.MarksareaggregatedacrossQuizzes2‐11. StudentshavetheoptiontosubstitutethelowestweeklymarkwithQuiz12mark.

Individualassignment  Consistsofasetof“short‐answer”questionswhichmayrequirecomputation,analytical derivationand/oranalysisofderivativeproducts. Theassignmentwillbehandedoutaroundweek5anddueweek8. Computationquestion(s)canbedoneinExcel,VBAorMATLAB(oranotherprogramming languageasapprovedbyCE).

StockTrak Trading Assignment

Thetradingassignment TheassignmentdocumentisavailableunderAssessmentsandExaminMoodle Keypoints:  ViaStockTrak,studentsarerequiredtotradespot,futuresandoptionslistedinUSmarketsatrealtime bid/askprices  CommencesinWeek1andendsinWeek10  RequiredtoregisterforTWO tradingcontests,apracticeone(MockTrading)andanassessableone (TradingGame)  Accountsfor10%ofoverallassessment  Marking:3marksforcompletingtherequirednumberoftrades,4marksforqualityoftradenotes,3 marksforperformance(relativetoyourclassmates).

Whytradinginthisunit? ThisisNOTacourseonderivativestrading,oreventradingforthatmatter. Thekeypurposeofincorporatingtradinginthisunitistoenrich yourunderstandingofderivativesby movingbeyonddefinitionsandtheoreticalconceptstoactuallyexperiencethemviaapractical application.  Textbooklearningprovidesanalyticalframework  Simulatedtradinggivesyouapracticalperspective

Thisactivitywillstrengthenyourunderstandingofconceptsthatyou  AcquiredaspartofDerivatives1(eg. dailysettlementandleveragednatureoffutures,extremeleverageof options,timevalueandintrinsicvalueofoptions)  Orwillpickupinthisunit(eg practicalapplicationofBSM,volatilitysmile,futuresoptions)

Sidebenefit:TodiscourageyoufromtradingfuturesandoptionswithrealmoneyUNTILyouhavehad successwithstockinvesting.

StockTrak  Avirtualtradingplatformthatallowssimulatedtradingatreal‐timebid/ask.  Coversmanyspotandderivativesmarkets  Availableathttp://monash.stocktrak.com/  Providesagreatwaytogainfirstexposuretoderivativestrading.  Therewereplatformissuesinpastsemesters,butIhavebeenassuredbymanagementthat theyhavebeenresolved.  DedicatedsupportfromStockTrak – direct contactdetailsareintheassignmentdocument.

Whatguidancewillyouget?  Againthisisnotatradingcourseandyoushouldbeabletocompletetheassignmentwithno priorexperienceintradingorinvesting. However,tomakeitaneducationalexperienceandnotarandomexercise,thefollowing guidanceisprovided: 1.ThefirsttwotutorialsaresetasidetohelpyougetstartedwithStockTrak andtradingin general.  Tute 1:registrationandfamiliarisingwiththeplatform  Tute 2:developsometradingframeworkfocusingonriskmanagement

2.Inthenextfewslides,Iwillgetyouallonthesamepagewithregardstobasicunderstandingof derivativesandtips. 3.Iwillrecommendatradingbookwrittenbyatoptrader/tradingeducator.

Misconception1 “It’snowAugustandtheDecemberfuturescontractistradingat1950/oz.Basedonyouranalysis, Decemberfuturespriceislikelytoriseinthenextcoupleofmonths. Supposeyourbrokerrequiresaninitialmarginof$5000/contract(covering100ozeach)and maintenancemarginof$3500/contract. With$20,000cash,youbuy 4Decembergoldcontracts. ItturnsoutyouranalysisiscorrectandDecembergoldpricerisesto2000byendofOctober, doublingyourmoney(2000‐1950)*100*4=20000)”

Really?Isitthatsimple?Whathavewemissedhere?

Misconception1 Thisscenarioisonlycorrectifthefuturespricedoesnotfallbeforereachingthat2000. Suppose1weekafterputtingonthetrade,theDecemberfuturesdropsto1930(merely1%) beforerisingagain. Markingtomarketmeansyourmarginaccountdropsto$12000,thusbreachingthe maintenancemargin(3500*4=14000). Ifyouhavenocashlefttotopup,yourbrokerwillsellyouout! Yourdreamofdoublingyourmoneyisshatteredbecauseyoudon’thaveacashreservetohold thepositiontil thepayday. Thepointhereisthatunlikestocktrading,futurestradingwithitsdailysettlementand marginingsystemmeansthatamateurscanbeeasilyshakenoutofapositioniftheydon’thave goodmoneymanagementinplace(nottomentionfear).

Misconception2 “Optionsallowyoutomakemoneyfastwhenyouareright,butifthemarketmovesagainstyou, youcanwalkawayandowenothing”.

What’swrongwiththisstatement?

Misconception2 Whenyouaretoldinatypicalderivativescoursethatbuyingacallgivesyouunlimitedgainwith limiteddownsideloss,suchstatementsoundsright.

Whatisignoredhereisthatthedownsidelimitis100%.Whenyoudon’tgetitrightwithan optionposition,itwillexpireworthlessandyouwilllose100%.Whatis“limited”aboutit?

Andwhatisthechanceofyougettingitright?Youneedtogetthreethingsrightsimultaneously: picktherightstock/asset,getthedirectionright,andgetthetimingright(ifyoubuya2‐month callonastockanditgetsstuckinatradingrangeforafewmonthsbeforedoubling,youwillstill lose100%ofyourcapital).

Misconception3 “IambullishonastockanddecidetobuyOTMcalloptionswith2monthstomaturity.Aslongas thestockmoveshigher,myoptionpositionwillmakemoneyandIcansellitwithoutwaitingtil theoptionisITM.”

Whatisignoredinthisthinking?

Misconception3 Recallthatoptionpremiumcomprisesintrinsicvalue(IV)andtimevalue(TV). WhenyoubuytheOTMoptionintheexample,IV=0andtheoptionpremiumisjusttheTV.Whatyou paidforis3monthsworthofhope:youhopethestockwillriseabovethestrikepricebyexpirydate Whilestockmovinghigherappearstoworkinfavourofthecall,theoptionalsoquicklylosesvalueat timepasses.It’sstillpossiblethatyourpositionmaylosevalueevenifthestockhasrisen.

Asanexample,considera$45strike,2monthcallona$40stock,tradingat$0.3.2weeksbeforethe expirydate,stockpricesincreasesto$44.SincethereisnotmuchleftinTV,andIVisstillzero,the valueofthecallmaybelessthan0.3:youroptionislosingmoneyevenwhenthestockisup10%.

Misconception4 “Ifyouarebullish,longafuturesorbuyacall.Ifyouarebearish,shortafuturesorbuyaput.”

What’swrongwiththisgeneralsuggestion?

Misconception4 Suchstatementsuggestsfuturesandoptionsareinterchangeable. Whatismissingisthatfuturesisapurebetondirectionwhereasoptionsareabetondirection aswellasvolatility.Evenifyougetthedirectionright,anoptioncanstilllosevalueifvolatility drops.

Considerbuyingputoptionsonthemarketwhenit’shighlyvolatile.Thishighvolatilityfeeds intoahighoptionpricesowhenthemarketstabilisesevenatalowerlevel,suchputcanstill losemoney.

HowshouldIapproachtheassignment? 1.

Whilelearningfromtheexperience,focusonriskmanagementinsteadofaimtomaximise profits.

2.

Ensuretowritequalitytradenotethatreflectsthoughtfulanalysis.

3.

Focusonstockandfuturesastheyareeasiertotradethanoptions.

4.

When trading options, usespreadstrategiesinsteadofsingleoptions:lessrisky

5.

Completetherecommendedreadinglistedinthe next slide.

6.

Donotletthisassignmentdistractyoufromotheraspectsoftheunit/otherunits.

Recommendmesomebooks/resources Recommendedreadingforthisassignment: Chapters1,2,3and7of“ComeInto My Trading Room” by Alexander Elder (available inMonash library– onlineandhardcopy)  

58 pages in total Tute 2 makes use of someofthesematerials

YouDON’Tneedtoreadthewholebookoranyotherbooksforthisassignment. For thosewhowanttolearnmoreabouttrading,readthewholebook. For more trading/investmentbookrecommendations,checkoutthewebsiteofColinNicholson www.bwts.com.au  BWTS: Build Wealth Through Shares

For freeaccesstocontemporarymarketanalyses,subscribetoLivewireMarketsat www.livewiremarkets.com

ActionsforWeek1 Go through tutorial 1andcompleteStockTrak registration CompleteMoodleQuiz1– trial:due11amFriday7August InstallMATLABto see if you want to pick up thisskill.

Nextlecture WienerProcessesandIto’sLemma...