Basic Black-Scholes:
Option Pricing and Trading

Timothy Falcon Crack, PhD (MIT)

1. Brief description

   This new book gives extremely clear explanations of Black-Scholes option pricing theory, and discusses direct applications of the theory to option trading. The presentation does not go far beyond basic Black-Scholes for three reasons: First, a novice need not go far beyond Black-Scholes to make money in the options markets; Second, all high-level option pricing theory is simply an extension of Black-Scholes; and Third, there already exist many books that look far beyond Black-Scholes without first laying the firm foundation given here. The trading advice does not go far beyond elementary call and put positions because more complex trades are simply combinations of these. The appendix includes Black-Scholes option pricing code for the HP17B, HP19B, and HP12C. An accompanying spreadsheet allows the user to forecast transactions costs for option positions using simple models.

2. Outstanding features

   Presentation based on award-winning teaching by Dr. Crack at Indiana University's Kelley School of Business.

3. Pedagogical features

   Suitable for undergraduate or masters courses in a US business school. Good background reading for financial economics PhD students.

4. Supplements

   The website has a downloadable spreadsheet that helps forecast option prices. The book contains the password.

5. Level

   Undergraduate or masters. Good background material for financial economics PhDs.

6. Has the material been class-tested?

   Yes. The author won many teaching awards using this material and this style of presentation.

7. Author's Background

   I have a PhD from MIT. I have papers published (or forthcoming) in the Journal of Finance, The Journal of Business, The Financial Analysts Journal, The Journal of Applied Finance, and the Journal of Financial Education. I have won five teaching awards and been nominated for five others. I recently headed a quantitative active equity research group in London, and have now accepted a chair (full professorship) in finance at Otago University in New Zealand.
   My web-based CV.

8. The Competition

   No other options pricing book presents this mix of theory and practical advice.

9. The Market

   Undergarduate and masters students at US business schools, and also anyone who wants to trade options in the US.

1. Introduction to Options (p1)

2. Maths, Stats, and Finance Prerequisites (p17)

3. Option Pricing Foundations (p45)

4. Risk-Neutral Option Pricing (p77)

5. Numerical Option Pricing: Monte Carlo (p91)

6. Numerical Option Pricing: Lattice/Binomial (p103)

7. Partial Differential Equations (p119)

8. Analytical Option Pricing: Black-Scholes (p129)

9. Beyond Black-Scholes (p177)

10. Trading (p201)

Appendices:

A. HP Source Code (p237)

References for Further Research (p247)
Over 80 articles cited in the text.

Index (pp257-278)
A full index covering approx 750 items.

1. Sample Chapters
   Not made available.
2. Schedule of completion
   The full manuscript is complete. It has been proofread and copyedited by a professional editor. The book is for sale on most online book sellers.
3. Length of work?
   Approx 100,000 words. This is approx 300 pages single spaced using LATEX document preparation system and "book" document style.
4. Art program
   There are about 15 figures. These have already been prepared in postscript format and are included in the document at the appropriate locations.
5. Word processing equipment
   The LATEX document preparation system is being used. Postscript graphics files are imported into the LATEX document automatically. LATEX can output postscript files for printing.
6. Qualified Reviewers
   Any capital markets (investments, derivatives, ...) professor at a North American university.

Last Updated: December 31, 2003