The document discusses modeling a system for managing options trading. It describes including key indicators like moneyness and yield to monitor positions. The system would display opportunities to enter long or short positions ordered by filters like volatility. It also suggests simulating scenarios like exercise, repurchase, and rollover to analyze potential gains and losses over time.

1. By Raul Tortima – Dec ‘18
FINANCIAL INTELLIGENCE
PivoltGlobal Modeling a System for Managing Options

2. As the saying goes "without control and measurement, there is no management", it is paramount
to monitor constantly, through measurements of some of the indicators involved in the mentioned
operations. From some information (strike, option price, underlying asset price), it is possible to
extract the necessary indicators for these measurements: Moneyness, Yield..
Modeling a system for managing options
by Raul Tortima
There is no doubt about the importance of technology in the world of finance. In some cases, the
lack of automated controls makes it impossible to implement the operation, such as the setting up
of strategies with options, in particular those that every investor should at least know: covered
calls and the sale of puts. Both are used as a hedge or to increase the overall return of the stock
portfolio and, despite the aforementioned control, these are operations which are easy to
understand..
In some cases, whether due to lack of liquidity, to approaching maturity or by distancing moneyness, the option price does not present a reference. These
situations can be disastrous for the investor who wants to clear a position, whether long or short. A possible solution, less professional, is the presentation of
orders according to some parameter of step over strikes with known prices. Another solution is to use the Black & Scholes model, which calculates a "fair" call
or put price, based on data parameters (maturity, interest, underlying asset price, option volatility). This functionality should therefore be part of the options
management system, being able to receive a given volatility, or to calculate it.

3. A fundamental monitoring for these types of operations is a discovery system, based on the parameters mentioned above
(strike, yield, moneyness, among others), whether isolated or in combination. Such subsystem would display all
opportunities for entering a long or short position, ordered by a selected filter. A parameter which could be added is
volatility (vol), as a way of inferring the actual chance of having the current price to reach the strike. Although historical vol
can be used, ideally it should be filtered and shown the implicit vol, derived from the same model of Black & Scholes quoted
above, since it is inferred from what the market judges as the level of current volatility from the market prices.
Modeling a system for managing options
Considering that the use of covered calls is for optimizing and improving the return of the stock portfolio, it is assumed that there is no interest in getting rid
of the asset. In this sense, monitoring the moneyness is essential to avoid an unwanted position exercise. On the opposite side, the sale of puts, moneyness
represents the distancing of a possible unwanted purchase. One way or another, moneyness is centerpiece from the beginning until clearing the whole
position. In parallel, the maximum drop indicates the limit for the break-even, considering the premium paid / received, as of when the open operation starts
to have a nominal loss. Last, but not least, the yield indicates the potential gain in case of exercise of the option. Some models could also consider the non-
exercise situation, showing the yield as the return over the required margin to open the position.
Simulated scenarios should be covered in case of exercise, repurchase and rollover (up / down and forward), as well as the situation of non-exercise. For the
exercise case, it is interesting to detail the gain / loss on the zeroing of the underlying, separate from the gain / loss obtained with the option. The repurchase
and rollover can be shown in a separate section, taking into account all the "up / down" rollover scenarios, respectively, and "forward". For estimated gain /
loss situations, an opportunity cost analysis could be aggregated by comparing it with benchmarks, over the same period as to the life of the option.

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