BLOOMBERG Derivatives

Bloomberg Doc ( Rasheed Abad - Master of Finance) Derivatives using Bloomberg
Version IV
Derivatives on Bloomberg
Derivative securities research on

Bloomberg
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Table of Contents
1 DERIVATIVES ON BLOOMBERG.................................................................................................. 3
1.1 GENERAL INTRODUCTIONS ........................................................................................................... 3
1.2 PRACTICE OPTION WITH APPLICATIONS USING BLOOMBERG ........................................................ 6
1.3 EQUITY OPTIONS .......................................................................................................................... 6
1.4 OPTION VALUATION (OV) / NUM 12. ........................................................................................... 7
1.5 EXOTIC OPTION VALUATION (OVX) / NUM 13. ......................................................................... 10
1.6 CURRENCY OPTIONS................................................................................................................... 16
1.7 INDEX OPTIONS .......................................................................................................................... 18
2 DERIVATIVE SECURITIES RESEARCH ON BLOOMBERG.................................................. 19
2.1 DES............................................................................................................................................ 19
2.2 OPTION VALUATION ( OV )........................................................................................................ 19
2.3 CALL/PUT VALUATION ( OVE ).................................................................................................. 21
2.4 OPTION (BID/ASK) MONITOR ( OMON ) .................................................................................... 21
2.5 CALL ANALYSIS - SENSITIVITY ( COAT ) ................................................................................... 22
2.6 OPTION HORIZON ANALYSIS ( OHT ) ......................................................................................... 23
2.7 OPTIONS POSITION HORIZON ANALYSIS ( OHTX )..................................................................... 24
2.8 COVERED CALL WRITE ANALYSIS ( CWA )................................................................................. 25
2.9 OPTION SCENARIO ANALYSIS ( OSA )........................................................................................ 26
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1 DERIVATIVES ON BLOOMBERG
1.1 General Introductions
Derivatives
Consider a stylized example.
A corporation is established by ten investors. Each puts up USD 100 in equity. There is
no debt. After one year, the corporation will be liquidated. At that time, if its net assets
are worth USD 900, each equity investor will realize a 10% return if assets are worth
USD 1100, each investor will realize a 10% return. This is summarized in Exhibit 1.
Exhibit 1
Case A Case B
Initial equity investment 1000 1000
Investment per equity investor 100 100
Initial debt investment 0 0
Investment per debt investor
Corporation's end-of-year asset value 900 1100
Cost of paying off debt investors 0 0
Residual value for equity investors 900 1100
Residual value per equity investor 90 110
Return realized by each equity investor 10% 10%
Without any debt financing, equity investors receive returns in
proportion to the corporation's overall performance.
Now consider the same corporation, but financed differently. The same ten investors each
put up USD 100, but only five of them hold equity. The other five hold debt. Debt
holders are guaranteed to receive USD 105. At the end of the year, if the corporation's
assets are worth USD 900, there will be USD 375 left over after paying debt holders.
Each equity investor will realize a 25% return. If, on the other hand, the corporation's
assets are worth 1100 at year end, there will be USD 575 left over after paying debt
holders. Each equity investor will realize a 15% return.
Exhibit 2
Case A Case B
Initial equity investment 500 500
Investment per equity investor 100 100
Initial debt investment 500 500
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Investment per debt investor 100 100

Corporation's end-of-year asset value 900 1100
Cost of paying off debt investors 525 525
Residual value for equity investors 375 575
Residual value per equity investor 75 115
Return realized by each equity investor 25% 15%
With debt financing, equity investors receive returns out of
proportion to the corporation's overall performance. The returns
are "leveraged."
Consider a Call Option. It offers a leveraged alternative to taking an outright position in

an underlying. Let's compare the risk-reward characteristics of an outright position vs. a
call option position.
Suppose shares of XYZ are trading at USD 100 and currently pay no dividends. An
investor pays USD1000 to buy 10 shares. She holds the position for three months. If, at
the end of that period, XYZ is trading at USD 92, the investor will realize a 8% return.
If it is trading at USD 108, the return will be 8%. See Exhibit 3.
Exhibit 3: Outright equity position

Case A Case B
Purchase price per share 100 100
Number of shares purchased 10 10
Total investment 1000 1000
Stock price after three months 92 108
Total value after three months 920 1080
Return 8% 8%
Direct investment in a company's stock offers returns directly
proportional to the stock's performance.
Now suppose, instead of taking an outright position in XYZ stock, the investor purchases
3-month call options struck at the money. These are trading at USD 5, so the investor
spends USD 1000 to buy 200 options. If, at the end of three months, XYZ is trading at
USD 92, the options will expire worthless. The investor's return will be 100%. If the
stock is trading at USD 110, her return will be 60%. See Exhibit 4.
Exhibit 4: Call Option position

Case A Case B
Purchase price per option 5 5
Number of options purchased 200 200
Total investment 1000 1000
Stock price at expiration 92 108
Option value at expiration 0 8
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Total value at expiration 0 1600

Return 100% 60%
Call options are leverage. They magnify risk and reward
compared to a direct purchase of the underlying.
Today, similar opportunities for such leverage abound. Essentially all derivatives
including futures, forwards, swap, vanilla options and exotics provide leveraged. They
offer indirect interest in an underlying for an initial investment that is less than the value
of that underlying. With some derivatives, such as forwards or swaps, no initial
investment is required. Securities lending and repurchase agreements can be used to
leverage a portfolio.
The widespread proliferation of derivatives is perhaps the primary motivation for modern
financial risk management.
Pricing
Consider an options trader who is about to sell an option. She intends to dynamically
hedge the exposure until the option expires. What price should she charge for the option?
Pricing proposes, given certain simplifying assumptions, that this cost could be known in
advance.
Pricing Strategies
When you purchase an option, you pay a premium whereas you receive a premium when
you sell an option. Your net P&L will be the difference between and intrinsic value
realized from exercising the option and the option premium you pay or receive. A well
organized portfolio consisting of different options can cancel out these factors. As a
result, we can get a portfolio with zero risk.
Consider you are going to sell a stock within certain range you construct a package with
such a Pricing Strategies to buy a put option with a low strike price, $20 and sell a call
option with a high strike price, $30. If the spot price is lower than $20, we are going to
exercise the put option and your call option dies. If the spot price is between $20 and $30
both of your options die and you can sell the underlying asset in the market. If the spot
price is over $30 you the put option dies and you will be asked to exercise the call option
by your counterpart. Since you buy a put option and sell a call option at the same time
then the net premium cost is zero.
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1.2 Practice Option with applications using Bloomberg

This session is intended for new users of Bloomberg that wants to know how to valuate
derivatives. Bloomberg service doesn t have a direct derivatives function (key); Instead,
to access the derivatives screens you have to be at the financial product you need. The
structure in this document will follow Bloomberg s and will be divided in the main
financial products: Equity and Currency Options and Commodities futures.
Notation used in this guide
All the commands are going to be written in parenthesis, when function keys (such as F1,
F2, F3) are used they will be italic, remember that function keys are assigned to different
markets, for example F8 is associated to the equity market.
1.3 Equity Options

All the exercises below are going to use the Intel Corporation Stock (INTC F8) for
Valuation purposes. The main Intel information page is shown below, in it number 6
corresponds to Options, Warrants & Convertibles. When clicking on 6, or typing 6 enter
(Go) you will get to the Main options screen.
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1.4 Option Valuation (OV) / Num 12.

First of all let s have a brief review of the Black-Scholes formulas to price an option1.
Where
and N(z) which is the normal probability for z. The Black and Scholes valuation model
uses these variables: the stock price (So), the exercise price (K) , time to expiration (T),
the risk free rate ( r ), the dividend rate (q) , and the volatility of the stock ( , its standard
deviation). All these variables can be entered into Bloomberg to value the option.
1. Stock price (So)
2. Strike price (K)
3. Time to expiration (T)
4. Risk free rate ( r )
5. Volatility
6. Dividend yield
1
John C. Hull: Options, Futures and Other Derivatives.
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1. Stock Price
The Price of INTC US Equity is the current stock price that Bloomberg register; note that
if you type exactly that (INTC US F8) into Bloomberg you will go again to the INTC
home page where you can check the last movements of the stock.
2. Strike price (K)
Bloomberg by default uses the same market price. You can change the price by clicking
in the amber zone and typing the strike price you would like; immediately after that the
price of the option will be updated.
3. Time to expiration (T)
The time to expiration can be settled by either changing the line where the days to
expiration are shown, this will make that the system updates the expiration date that is
shown two lines below, or vice versa.
4. Risk free rate ( r )
The rate used by Bloomberg is an interpolated point from the default curve that coincides
with the time to expiration of the option. The default curve is defined in the page: RDFL
<Enter>. If you don t go to this page Bloomberg will use its own Default curve.
In the RDFL page you can change the default curve just by typing in the amber zone the
code of one of the curves listed below. For example, if you want to use the US
Government Strips you should type I39.
5. Volatility
There are two basic ways to estimate the volatility. The first method uses historical data
(Bloomberg default), while the second technique employs actual data from the options
market given the prices of options traded. In Bloomberg you can choose between these
two methods. The volatility is calculated as the standard deviation of the day-to-day
logarithmic price returns expressed as an annualized percentage. The basic volatility
formulas are:
Pt
PRt
Pt 1
T
1
PR ln( PRt )
T t 1
T
2 1
Var(PR)= (ln PRt PR ) 2
T 1t 1
Annualized = Daily BD
BD= Business day in a year, it s usually in the range (250, 256, 260)
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The default volatility is based on the historical volatility of the underlying security. The
Historical Price Volatility function, HVT displays historical volatility for the underlying
security. HVT <HELP> displays further information. Bloomberg takes the last 90 days of
data of the underlying security as of the previous day's calculations, and then it is
annualized using 260 days (business days). In the right low corner of the HVT page you
have the information about current market implied volatilities for Calls and Puts.
The periodicity of the data has the possibility to be changed in the amber zone at the right
of Period. There you can pick among daily (D), weekly (W) or monthly (M) data
frequency to compute the annualized volatility. Also, you can choose the type of data you
are going to use; the 4 different possibilities are:
T- Trade: last trade registered in Bloomberg (default).

B- Bid: last Bid registered in Bloomberg.
A- Ask: last Ask registered in Bloomberg.
V- Volume: The weighted average by volume of all the operations registered in
Bloomberg.
To use either implied or historical volatility you have to be in the OV page. There if you
change the volatility that is in the Option Valuation and Risk Parameters the price of the
option will be automatically updated, this means that you can check what will be the
theoretical price for any given volatility.
6. Dividend yield
OV uses either discrete dividends, or a dividend yield (continuous dividends), which is

calculated from the projected dividend streams. Some models (e.g., Trinomial Tree)
allow using either discrete or continuous dividends. Other models (e.g., Black Scholes)
are limited to continuous dividends. Switching between dividend types (when applicable)
can be done via the OV Dividend Defaults window; which is accessed by typing 3 <go>
in the OV screen.
Information in the Dividend Screen:
- Dividend Yield: The dividend per share divided by the stock's market price per
share, in percentage terms.
- Num of Divs: The number of dividends. The overall number of flows prior to
expiration.
- Sum of Divs: The sum of dividends. The overall amount of dividends paid out
during the period.
- Last Div Date: The last dividend date. The date of the last dividend prior to
expiration.
- Ex-Date:The ex-dividend date. The date before which you must own the security
in order to receive the current dividend.
- Amount: The amount of the actual or projected dividend.
- Dividend flow from: The date range used to calculate the dividend.
- Annualized Dividend Flow: The sum of all the dividend payments made by the
stocks in the index calculated on an annual basis.
- Annualized Dividend Yield: The dividend yield calculated on an annual basis.
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Current Market Screen
If you are in the security screen ant types either call (enter) or Put (enter) you will be
directed to the options market summary page for calls/puts. There you can compare in a
very fast way the last reported prices and the theoretical prices for the option.
You can also type OMON (enter) to go a page when you can see in a matrix and very
organized manner the actual prices. Each price in the matrix can give you more
information if you just click and hold the mouse and release it over DES (descripton).
1.5 Exotic Option Valuation (OVX) / Num 13.

8- Barrier Options:
As with any option, a barrier option is a contract that specifies a payoff to the investor,
based on the price of some underlying asset. Unlike standard options, there is a critical
price for the underlying stock, called the barrier, which is specified at the time the option
contract is initiated.
Should the price of the underlying stock breach (i.e. cross) this barrier before option
expiration, the option can either be extinguished immediately or be replaced by a
standard option. The test of whether the underlying stock price has crossed the barrier
can be done continuously or infrequently, such as once a week or once a day.
1. Description of the screen:
Barrier 1: The level of the barrier if the barrier type is Knockout or Knockin. For the
double barrier option, this is the level of one of the barriers.
Barrier 2: For double barrier options, the level of the second barrier.
Rebate 1: The rebate payment in currency units (e.g., US dollars). The payment can be 0
or greater. For Knockouts, it is the rebate you get when you cross barrier #1 assuming
payment at the time the barrier is crossed. For Knockins, this is paid at expiration if
the barrier has not been crossed by then.
Rebate 2: For double barrier options. The rebate payment in currency units (e.g., US
dollars). The payment can be 0 or greater. For double Knockouts, it is the rebate you get
when you cross barrier #2, assuming payment at the time the barrier is crossed. For
double Knockins, this is paid at expiration if neither barrier has been crossed by then.
This rebate is required to have the same value as rebate #1 in this case.
Barrier type: For a list of barrier types, move your cursor to the highlighted field.
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Direction: The barrier must be crossed in this direction. For example, choose (1) up for
up-and-out. For a list of options, move your cursor to the highlighted field.
Monitoring frequency: How often (in days) the asset price is checked to see if the barrier
has been breached. For example, (0) continuous monitoring, (1) once a day at closing,
etc. NOTE: Assumes that the "Last monitored date" is monitored.
First Mon. Date: The date the monitoring starts. Defaults to the trade date.
Last Mon. Date: The date the monitoring ends. Defaults to the option expiration date.
NOTE: OVX calculates barrier options using dividend yields. Calculations based on
discrete dividends are not available. When you first run OVX, dividend yield is
calculated based on existing projections for the first year. If projections are not available
for the first year and the option has a longer horizon, yield is calculated based on
projections for the second year.
2. Description of Barrier Options:
Knockout option: A barrier option that is automatically terminated if the

(monitored) asset (index) price, S(t), breaches the barrier, H, before option expiration. If
this happens, a rebate is paid. If S < H, then the barrier may be breached only if the index
moves up to the barrier up-and-out option. Conversely, for S > H, the barrier would have
a down-and-out option.
Knockin option: A contract that causes a plain-vanilla option to come into existence
automatically if the (monitored) value of the index breaches the barrier before the
contract's expiration. If this does not happen, a rebate is paid at expiration.
Double knockout / knockin: An option with two barriers. For example, a double
knockout option would have a simultaneous down-and-out and up-and-out feature
(H_down < S < H_up). Such an option would terminate the moment either the upper or
lower barrier is breached. (Also called double-one-touch).
9- Asian Options:
An Asian option, also known as an averaging option, has a payoff that depends on a
specified average of prices observed for the underlying asset over some period prior to
option expiration. The two major categories are average rate and average strike options.
An average rate option has a payoff given by:
max[ 0, Average(S1,S2,...,SN) - K ] (call)
max[ 0, K - Average(S1,S2,...,SN) ] (put)
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where:
Sj = price of the underlying asset observed at time tj, j=1,...,N.
tj <= tN.
TN = option expiry.
K = strike.
1) Description of the screen:
Average Rate or Strike: The type of option. For a list of choices, move your cursor to the
highlighted field.
Average Start: The date on which the averaging starts.
Average End: The date on which the averaging ends.
Averaging Method: Choose (A) Arithmetic or (G) Geometric.
Averaging Frequency: Choose (D) Discrete or (C) Continuous sampling of the asset
price.
Averaging Weighting: Enter (W) to use unequal weights for averaging, then enter
4 <Go> to choose the weights and edit the WEIGHT column in the popup window.
Otherwise, enter (U) to use unweighted averaging, where all the weights equal 1.
Averaging Points: The number of averaging points during the averaging period.
Average So Far: The average up to and including the trade date.
10- Digital (Binary) Options:
Binary (a.k.a. digital, or all-or-nothing) options can be subdivided into five categories:
cash-or-nothing options, asset-or-nothing options, supershares, superfunds, and gap
options.
Payoffs of the different types of Binary options:

Cash or nothing call equals:
B, if S(T) > K,
0 otherwise,
where B is a fixed amount (the binary payoff), S(T) is the asset price at exercise (denoted
by time T), K is the strike. The corresponding put option pays:
B, if S(T) < K,
0 otherwise.
The payoff of an asset or nothing call equals:
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S(T), if S(T) > K,

0 otherwise,
i.e. if the asset price at exercise exceeds the strike, the option holder gets
the asset value. The corresponding put pays:
S(T), if S(T) < K,

0 otherwise,
A supershare pays an amount B if the asset price at exercise is between the two
strike prices, K1 < S(T) < K2.
A superfund (sometimes also called "supershare," which can lead to ambiguity;

within the OVX function the terms supershare and superfund are used
consistently, according to the definitions in this <HELP> screen) pays:
S(T)/K1, if K1 <= S(T) < K2,

0 otherwise
A gap option highlights the dual role of the strike in a standard option. Here
the strike that determines whether the option is in-the-money, and the strike
that determines the size of the payoff, are different. Thus, the payoff is
k * [ S(T) - K2 ], if k * [ S(T) - K1 ] > 0,

0 otherwise,
where k = 1 for a call, -1 for a put.
11- Lookback Options:
The lookback option gives the holder the right to purchase or sell the underlying asset at
the best possible price attained over the life of the option. The monitoring of the
underlying price can be done continuously, or infrequently, such as once a week or once
a day.
1) Description of the screen:
In addition to the standard option fields, the following fields appear for lookback options:
Fixed or Floating Strike: The type of strike price. For a list of choices,
move your cursor to the highlighted field. The strike could be either (1) float, in which
case the value of the strike parameter is ignored or (2) Fixed.
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- Floating Strike: Can be seen as ordinary puts and calls where the strike price is replaced
by the lowest (for call) or highest (for put) price achieved during the so-called lookback
period. The payoff functions are:
Lookback call
S(T) - min(S(0),S(1),S(2),.....,S(T))
Lookback put
max(S(0),S(1),S(2),.....,S(T)) - S(T)
where S(0),S(1),S(2),.......,S(T) is the sequence of underlying prices observed

during the life of the option.
- Fixed Strike (Modified Lookbacks): Ordinary puts and calls where the price of the
underlying asset is replaced by the lowest (for puts) or highest (for calls) price achieved
during the lookback period. The payoff functions are:
fixed strike lookback call

MAX[0, max(S(0),S(1),S(2),.....,S(T)) - K]
fixed strike lookback put

MAX[0, K - min(S(0),S(1),S(2),.....,S(T))]
Partial Monitored: For discrete and partial monitoring of the underlying asset, Bloomberg
uses a proprietary technique that extends those of S. Babbs (which addresses floating
strike lookbacks) and T.H.F Cheuk & T.C.F. Vorst (which address also fixed strike
lookback). The complication of a tree calculation arises from the fact that the value of
lookback options at each node depends not only on the underlying price and the time but
also on the Min (Max) for call (put) achieved at each time step, i.e. the calculation
becomes path dependent. The Babbs method sums different price paths for the
underlying asset in such a way that the resulting tree only requires one calculation per
node. The idea is to express the payoff in terms of units of the asset instead of price. In
doing so, the payoff can be written in terms of only one variable which for the case of
floating-strike is N(t) = Ln(S(t)/M(t)) where M(t) stands for the min/max price achieved
so far by the asset price S(t).
- Lookback options: (a) The monitoring period of the movement of the underlying
asset is any subset of the tenor of the option. For example, consider a partial lookback
option with six months to expiration, where the observation is only in force for
the first three months. (b) The "partial" indicates that the strike price is some percentage
(Z) of the observed maximum/minimum (also known as variable floating strike
option). The payoff functions are:
Call:
S(T) - Z*min(S(0),S(1),S(2),.....,S(T))
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Put:
Z*max(S(0),S(1),S(2),.....,S(T)) - S(T)
- Ladder options: Limited lookbacks in which a series of threshold prices (rungs) are set
for the underlying security. Like the lookback options, the strike can be either fixed or
floating. For a ladder with rungs (L1,L2,L3,...., Ln), define Lmin to be the lowest rung
the share price ever went below and Lmax as the highest rung the share price ever went
above. The payoff functions for a floating-strike ladder are:
Ladder Call:
MAX[0, S(T) - min(Lmin,S(T))]
Ladder Put:
MAX[0, max(Lmax,S(T)) - S(T)]
The payoff functions for fixed-strike (modified ladder) are:
Fixed-strike ladder call:

MAX[0, max(Lmax,S(T)) - K]
Fixed-strike ladder put:

MAX[0, K - min(Lmin,S(T))]
The following fields appear for partially monitored options:
First Lookback Dt: The date the monitoring starts.
Last Lookback Dt: The date the monitoring ends.
Lookback or Ladder: If you choose (2) Ladder, the Ladder Level Defaults screen appears.
Enter the threshold prices for the underlying security in the highlighted fields.
Minimum/Maximum so far: The minimum or maximum level achieved to date by the

underlying security. If you choose (1) Float in the Fixed or Floating Strike field,
Maximum appears. If you choose (2) Fixed, Minimum appears.
Percent of Minimum/Maximum to use: The percentage of the minimum/maximum to use

as the value of the strike.
Monitoring Frequency: The frequency (in days) at which the asset price is checked to see
if the barrier is breached. For example, enter (0) for continuous monitoring, (2) for once
every two days, or (0.5) for twice a day.
Option Valuation and Risk Parameters
7-Day Decay: The amount of option premium that is lost over seven days.
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1.6 Currency Options

All the exercises below are going to use Euro/Dollar exchange rate (EUR F11) for
Valuation purposes, in its main page, number 6 corresponds to Option Analysis. In the
Equity Option example we used the OV screen, in currency, even though it is not listed,
you can access it by typing OV; Bloomberg recommends using the new FX options
calculator: OVML which has a lot more capabilities.
This is the main OVML screen:
Creating and valuing an option in the OVML screen.
To create currency OTC options in order to value them you have to complete the
following steps, which can also be used to value saved options in Bloomberg (saving
options is explained later):
Creating a new Option and saving it:

1. Enter OVML <Go>. The screen defaults to a vanilla option.
2. Select the appropriate parameters in all the amber zones. Some descriptions:
o Currency: EURUSD The two currencies involved in the contract, and it
also denotes the notation of the strike price, if you need to change the
exchange rate is computed go to the menu Update-> Flip-> Flip Currency.
The notation for the currencies: USD: Dollar; JPY: Yen; GBP: British
pound; CHF: Swiss Franc; CAD: Canadian dollar; AUD: Australian
dollar.
o Price: price is the value for every 10,000 of notional.
o Premium: Is the value of the transaction, it means how much you will have
to pay if you actually write the option.
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o Style: additional to the common European and American options, in the

Single leg option valuation screen you can choose between knock-in and
knock-out.
o Call/ Put on: the currency delivered (if you buy a call) to you at the end of
the contract if the contract is in the money.
o Strike: This is the exchange rate that you are fixing in the contract.
o Notional: Size of the contract
3. To Save the data you go to the menu Tools/Options ->Save Option
Valuating Complex Strategies in the OVML Screen.
The OVML screen has the possibility two value two leg option strategies. In the Strategy
Menu you can pick form the most common strategies. The strategies listed are:
Single Straddle: This is the one discussed before, it s the one option strategy.
Straddle: This strategy involves buying a call option and a put option on the same
asset at the same strike price and expiration date. This gives you limited risk and
unlimited profit potential with a major move in either direction. Is a bet on an
increase in volatility .
Strangle: This strategy involves buying an out-of-the-money call option and an
out-of-the-money put option on the same asset with the same expiration date and
different strike prices. This gives you limited risk and unlimited profit potential
with a major move in either direction.
Risk Reversal: It is a hedge strategy that consists of selling a call and buying a put
option. This strategy protects against unfavorable, downward price movements
but limits the profits that can be made from favorable upward price movements.
Participating Forward: The Participating Forward strategy offers full and
immediate hedging of exchange risk and, at the same time, offers the opportunity
to participate in favorable exchange rate fluctuations up to a pre-defined level. In
most cases, this strategy is constructed as a zero-cost instrument. This implies that
you can reduce or eliminate the premium associated with a standard option
contract. This strategy is identical to the Risk Reversal strategy in all aspects
except that the Strike field is combined under this strategy. The Participating
Forward strategy involves buying one option and selling another option with the
same strike and maturity, but with a different notional amount.
Diagonal Spread: The Diagonal Spread strategy involves buying one option and
selling another option with different strikes and different maturities. This strategy
can be used to take a position in forward volatility or the implied forward
volatility surface.
Call/Put Spread: The Call/Put Spread strategy involves the purchase and sale of a
call or put with different strikes. For example, buy a call option with a relatively
low strike, and sell a call option with a high strike.
Calendar Spread: The Calendar Spread strategy involves an option strategy in
which a short-term option is sold and a longer-term option is bought, with both
having the same striking price. Puts or calls may be used.
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Two Leg: Two leg is the general structure you need to create a two leg options
strategy.
In all of these strategies you use the same parameters as in the one leg option strategy.
1.7 Index Options

Index options use the same screens as the Equity options. You just have to find the index
you want to valuate and type either OV (enter) for the Option Valuation screen or OVX
for the Exotic Option Valuation Screen.
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Bloomberg Documentation ( Rasheed Abad UIA ) Quick Start Guide
2 DERIVATIVE SECURITIES RESEARCH ON

BLOOMBERG
2.1 DES
Description, displays basic information about a specific futures contract as supplied by
the exchange on which the contract is listed: the contract size, value of a point, tick value,
delivery dates, option expiration dates, last trading day of contract, available option strike
prices, daily price limits, and the time the contract trades. The description screen is
perhaps the most important screen for you to look at because it lets you know the specific
characteristics of the futures contract (page 2 of DES displays option information). DES
also displays generic ticker symbols so you can analyze commodities historically (type
US1 (US2, US3 etc.) <Cmdty~ <Go> to track generic first, second contracts historically.
Define commodity and type DES <Go>.
Option Analysis:
2.2 Option Valuation ( OV )

Option Valuation, calculates the value of an equity option given a variety of personally
selected assumptions. Type OV <Go>.
Same option using Normal Mean rev model
KENMS Lab, IIUM Page 19 of 30


Options-Estimated Prices:
2.3 Call/Put Valuation ( OVE )

Call/Put Valuation displays a list of the current market option prices. If an option has not
traded and the underlying commodity has moved in price the screen uses TRADE
MATCHED VOLATILITY to estimate the theoretical price of the option assuming
option implied volatility is the same as the implied volatility of the last trade of the
option. OVE shows intraday option valuation as well as current estimated prices for up to
8 listed call/put strikes on an underlying futures contract. (Run CVE for call valuation
and PVE for puts.) Define the commodity and type OVE <Go>.
Options-Current Market:
2.4 Option (Bid/Ask) Monitor ( OMON )

Option (Bid/Ask) Monitor, displays the current market information for options on a
security: the bid, offer, and last trade. OMON currently displays the current month at the
top of the screen with back months on the following pages (press <Page Fwd> for
LEAPS, if they exist). Define the commodity and type OMON <Go> (to access specific
option type number (for specific option) <Cmdty> <Go>.
For example: IBM < Equity > OMON < Go >

2.5 Call analysis - Sensitivity ( COAT )

Call analysis (Sensitivity) Table, provides option valuation sensitivity measures for up to
8 call strike prices for an underlying futures contract. The screen allows you to enter
your market assumptions and analyze possible outcomes. It shows the main risks
confronting an options trader, such as changes in futures price (gamma) and volatility
(vega) and the rate of decay in an option s value as expiration approaches. POAT, put
analysis (sensitivity) table, is identical to COAT except that POAT analyzes put options.
Define the commodity and type COAT <Go>.

2.6 Option Horizon Analysis ( OHT )

Option Horizon Analysis, allow you to simulate how changes in price, time and volatility
will effect option valuation. It provides option horizon analysis for up to 8 listed call/put
strikes on an underlying futures contract. You can design any market scenario you desire
changing the underlying futures price, volatility level and time to expiration. OHT
displays value of a straddle. Define the commodity and type OHT <Go>.

2.7 Options Position Horizon Analysis ( OHTX )

Options Position Horizon Analysis allows you to run and future analysis under various
market scenarios. You can compare different strategies to determine which position
matches your risk/reward ratios given your outlook on the market. It lets you see how
your profit and loss, dollar risk, and net delta of your position would be altered by a
change in the futures price, or volatility, or the erosion in the time period before
expiration. Define the commodity and type OHTX <Go>.

2.8 Covered call write analysis ( CWA )

Covered call write analysis

CWS--Covered Write Scan
2.9 Option Scenario Analysis ( OSA )

Option Scenario Analysis, provides a flexible option horizon analysis for up a selected
equity. Create up to three scenarios and view their effects on each position you hold.
Select the equity and type OSA <Go>.
For example: IBM <Equity> OSA <Go>
In addition, the followings are how to value commodity options using Bloomberg

How to value index options using Bloomberg
Next is an example of using Bloomberg to analyze Option-adjusted Spread Analysis




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Derivative securities research on

1.1 General Introductions

Consider a stylized example.

Investment per debt investor 100 100

Consider a Call Option. It offers a leveraged alternative to taking an outright position in

Exhibit 3: Outright equity position

Exhibit 4: Call Option position

Total value at expiration 0 1600

1.2 Practice Option with applications using Bloomberg

Notation used in this guide

1.3 Equity Options

1.4 Option Valuation (OV) / Num 12.

1. Stock price (So)

2. Strike price (K)

3. Time to expiration (T)

4. Risk free rate ( r )

2. Strike price (K)

3. Time to expiration (T)

4. Risk free rate ( r )

T- Trade: last trade registered in Bloomberg (default).

OV uses either discrete dividends, or a dividend yield (continuous dividends), which is

Current Market Screen

1.5 Exotic Option Valuation (OVX) / Num 13.

1. Description of the screen:

2. Description of Barrier Options:

Knockout option: A barrier option that is automatically terminated if the

An average rate option has a payoff given by:

max[ 0, Average(S1,S2,...,SN) - K ] (call)

max[ 0, K - Average(S1,S2,...,SN) ] (put)

1) Description of the screen:

Average Start: The date on which the averaging starts.

Average End: The date on which the averaging ends.

Averaging Method: Choose (A) Arithmetic or (G) Geometric.

Average So Far: The average up to and including the trade date.

10- Digital (Binary) Options:

Payoffs of the different types of Binary options:

S(T), if S(T) > K,

S(T), if S(T) < K,

A superfund (sometimes also called "supershare," which can lead to ambiguity;

S(T)/K1, if K1 <= S(T) < K2,

k * [ S(T) - K2 ], if k * [ S(T) - K1 ] > 0,

where k = 1 for a call, -1 for a put.

11- Lookback Options:

1) Description of the screen:

where S(0),S(1),S(2),.......,S(T) is the sequence of underlying prices observed

fixed strike lookback call

fixed strike lookback put

Fixed-strike ladder call:

Fixed-strike ladder put:

The following fields appear for partially monitored options:

First Lookback Dt: The date the monitoring starts.

Last Lookback Dt: The date the monitoring ends.

Minimum/Maximum so far: The minimum or maximum level achieved to date by the

Percent of Minimum/Maximum to use: The percentage of the minimum/maximum to use

Option Valuation and Risk Parameters

1.6 Currency Options

This is the main OVML screen:

Creating and valuing an option in the OVML screen.

Creating a new Option and saving it:

o Style: additional to the common European and American options, in the

Valuating Complex Strategies in the OVML Screen.

1.7 Index Options