Where to read up on equity derivatives strategies?
I'm interviewing for an entry level Equity Derivative Sales role and looking to prep as much as possible. Currently, I have a grasp on the basic types of equity derivatives, option greeks, black scholes model. I also have some knowledge of hedging techniques for equities, but extremely basic ie. what you would be able to do in a basic personal investment portfolio.
Where would be a great place to look to learn more about more advanced institutional hedging strategies, etc. I saw a post from a while back about a GS deriv sales question that asked: "Which structured product would you issue in the current market conditions?" While I don't think they would expect a highly technical answer to that, I'd like to be able to at least discuss a strategy at a more broad level.
Any input or advice would be greatly appreciated.
Thanks
go on volcube and buy the ebooks, they're like 9.99 each... I believe there are 5 series and it's not too long or too short but has valuable info and straight to the point from a market making / trading perspective only. Personally my favorite.
given that you have an interview, the John hull book covers way too much stuff for you to even grasp it in a short period. it’s something you should read, as oppose to cramming it. the below series probably will take you couple days at most to understand it though it may take couple reads to fully grasp it.
each series covers
vol strategies market making managing Greeks gamma trading etc
"Options, Futures & Other Derives" by John C. Hull - the derivatives trader's bible. It's expensive (about $80 new as a paperback, Amazon tells me) and I'm almost certain your future desk will have a copy lying around somewhere, but if you want a leg-up, this is the go-to book.
I'm gonna play devil's advocate. Hull is kinda garbage imo. It is extremely dry and overexplains to taking a very easy concept that you may already and make it hard to understand. Most likely scenario is that if you buy it you will read a few pages get bored and prominently display it on your desk or at your apartment never to be read again. What I would do instead is try to get a baseline of black scholes and its derivation. Then code out a model in VBA that takes historic data to spit out an option price. If you do that then from there calculate the greeks and see how they interract with eachother as you change inputs. That way you can force yourself to learn the basics of option pricing, teach yourself some coding, and see how the different components of the program tie together.
Thanks for the advice, i'll check those out, mangaed to find an older 9th edition version online so i'll use that for now. In regards to thinking of strategies, should I group them in: What to do if markets go up, what to do if markets go down, what to do if markets are horizontal, stuff for interest rates, inflation, and maybe FX?
I honestly think it's quite difficult to group strategies on a linear basis as you're suggesting.
If I was starting from scratch, I'd do this...
Start off by creating a list of the strategies / structures you come across - can be in more or less any order / grouping you see fit, however for the sake of your own sanity I'd suggest going from least to most complex under each heading. I'd likely do it by product rather than by market scenario (e.g. futures, options, swaps, exotics, etc).
I'd then go about adding a scenario label to each strategy / structure. For example, you could have a shorthand list of environments for when each structure is applicable (e.g. Bu = bull market; Be = bear market; HV = high vol environment; LV = low vol environment, etc). I'd then go through the strategies and attribute as many or as few attributes to each as you see fit.
You can then construct a matrix of market scenarios and cross-reference what you determine the relevant strategy for that market environment mix, then checking your more detailed notes if you need a reminder of that structure's specifics. If memory serves, Sheldon Natenberg constructs a comparable matrix of sorts at the end of "Option Volatility & Pricing" (another book worth looking at).
This may be OTT, but if you have time on your hands, the repetitiveness of the exercise alone will be worthwhile if only to ingrain the different variables in your memory. You can then email the end product to yourself at work and update it over time, realising that some structures are more common than others, that some are more frequent in certain products than others, etc.
All going well, I'd imagine that this will likely become a useful reference tool for you early in your career.
Volatility Trading by Sinclair and Volatility and Correlation by Rebonato are the best. Also Natenmberg's option volatility and pricing is a sort of masterpiece
I'm also currently studying for the CFA lvl 1 exam. There are a few chapters dedicated to derivatives in my books. Would that be an alright starting point, or too simplistic?
OP - what kind of equity derivatives? There different types. There is a lot of literature on options and so it is good to be acquainted with that. Watch YouTube videos, read some short books. I think I read Levy which is not short but not a tough read. Heck start with options for dummies if you want. Understand futures, etfs, baskets, some structured products (things like insurance companies and annuity products often skew the options markets in “non rational” ways on a regular basis and much of the market knows it and trades off of that.
As a salesperson I strongly doubt that you would have to derive and program black scholes etc (I hope). Heck half the salespeople can probably barely spell black scholes. Honestly a salesperson’s job is to be friendly, liked and get things done. This means showing prices, helping the trader and team protect the book and get rid of stuff you don’t want, know your clients (not just personally but how they trade what they like etc - so you can show them things) in short MOVE PAPER. It can be a delicate balancing act as you need to service clients but at the same time need to run a profitable book so you and team can get paid.
Try not to get too caught up in complex structures because they will confuse you and you’ll have time to learn all that on the desk. Just try to build a solid fundamental base. But know the kinds of derivatives, and how they can be used. Who trades them? When? Why? How can they help express a trade of investment idea? What are the ways you can make money? More importantly, what are the ways YOU CAN LOSE MONEY?
You’ll do fine. Work hard, smile, offer to help and try to be a sponge.
On that GS question, a response I would have given would have been (and not gotten me the job), a structured product for us to make money? Or for the client...?
A general rule of thumb in this business is: the high margin, exotic, often illiquid stuff is usually what makes money for the bank and rips customers off.
Good Luck
Thank you for that super helpful insight, i'll make sure to keep those in mind when reviewing. As for the types, I think i'll mostly be on simpler stuff as the role is structured as a training program. Notes, listed options, OTC options, maybe some more structured stuff as I learn. Primarily focused on equities, but some stuff on forex, rates and commodities so i'm guessing futures and swaps.
By ripping customers off, do you mean like structured notes for retail customers or structured stuff for corporates? I thought the exotic stuff on the corporate side was for like specific hedging needs. I've heard a bunch of bad things about crappy structured notes for retails from both the news and people I've talked to.
Occam's razor, if you overcomplicate things it probably isn't the best solution. I think structured products have their place and even if they do the hedging job the user is probably getting fucked on price precisely because it is so complicated they don't know how to value it.
So a quick question in regards to how banks are profiting off selling the derivatives. Do they basically buy the underlying products, equities, commodities, FI, etc. Then bundle them up into the derivative product, then sell the derivative products at a higher price to the original components they purchased?
You could find good Equity Derivative questions on Glassdoor - SOciete Generale interview questions.
I would google some of the products that Goldman sells, or are available in the space, and then pitch those.
For example: There are products that give you positive exposure to volatility (find out the name of the product and pitch that). There are numerous products, and if you can talk intelligently about the product and why you're pitching it, that will make you look really good.
tabb book
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