BFC3340 - Trading Assignment 2023
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BFC3340 - Trading Assignment
Due date: 4:30pm 8 September 2023
1. Overview
This individual assignment requires you to trade options using StockTrak, a virtual trading platform that allows simulated trading at real-time bid/ask prices. The aim is to provide exposure to close to real world trading experience while testing your understanding the dynamics of option prices and Greek letters.
2. Requirements
- With an initial capital of $1,000,000, you are required to conduct one (1) round-trip
option trade in StockTrak. The trade consists of an opening trade and a closing trade. Examples of a roundtrip trade: buy a call then sell the call 3 days later; or short a straddle (by going short on a call and short on a put with the same strike) then buy to close the straddle 5 days later.
- The trade is to be closed out within 5 calendar days.
- For the trade executed, complete a trade journal in a MATLAB live script. See below for what should go into the trade journal. A MATLAB template is also provided for you to use.
- To complete this assignment, you need to register for a StockTrak account then join the trading challenge called BFC3340.
What we are looking for in the trade journal:
- Trade description: what option strategy are you using? On what stock? Over what horizon? What view does that strategy seek to exploit (eg are you betting that the stock is going up or its volatility is going down?) Refer to Trade selection below.
- Pre-trade calculation for the option(s) to be traded: Greeks, implied volatility (IV), historical volatility (HV)
- Pre-trade analysis: Provide brief commentary on Greeks and comparison of IV versus HV
- Opening trade details: Describe the actual opening trade that is executed in
StockTrak (option price, stock price at the time of the trade, date). Refer to the FAQs section below for the need to time match the option price and stock price. Recompute greeks and IV and note any material variation from the pre-trade analysis.
- Exit trade: Describe the actual exit trade that is executed in StockTrak (option price, stock price at the time of the trade, date).
- Post-trade calculation: Compute actual profit or loss (P&L) on the trade, decompose P&L into delta, gamma, theta and vega effect.
- Post-trade analysis: Based on the P&L decomposition, write a 3-5 sentence
paragraph to reflect on the outcome of the trade, in particular whether or not the trade went according to plan.
- Pre-trade data: supply all data used in the pre-trade calculation (historical stock
prices, riskfree rate, dividend, spot price). Spot price data can be obtained from a number of sources, detailed below. Store the data in a .mat file and include it in your submission.
What to submit
- Trade Journals, in a MATLAB livescript (.mlx) file. A template is provided on Moodle.
- Trade Data, in a MATLAB data file (.mat) containing all data needed to run your livescript.
- Screenshots of your Transaction History showing the trades given, either as separate files or contained within your livescript.
3. Marking
This assignment is marked to 10 marks and contributes to 10% of the overall assessment.
The marking is based entirely on the completeness of the trade journal in terms of covering the points listed above, and the quality of the analysis. Marking is NOT based on return
performance.
8-10 marks: are awarded to students who provide a complete trade journal with correctly
computed required quantities, demonstrate a strong understanding of the greeks which
helps formulate a suitable strategy, and top it with a thorough and accurate evaluation of the trade’s P&L.
7: is awarded to students who provide a complete trade journal that correctly computes most of the required quantities, demonstrate a good understanding of the greeks which helps
formulate a suitable strategy, and top it with a thorough evaluation of the trade’s P&L.
6 is awarded to students who provide a complete trade journal that correctly computes most of the required quantities, demonstrate a good understanding of the greeks, however the
trades executed are not well supported by the analysis; and the post-trade evaluation is incomplete or not thorough.
5 is awarded to students who provide a trade journal that correctly computes many of the required quantities, demonstrate a fair understanding of the greeks, however the trades
executed are not well supported by the pre-trade analysis; and the post-trade evaluation is weak or absent.
<5 marks are awarded to students who fail to provide a trade journal; and/or show incorrect
calculation of most of required quantities; however the trades executed are not well supported by the pre-trade analysis; and the post-trade evaluation is weak or absent.
0 mark is given to students who did not submit or make up trades that did not match with the Transaction history
Late submission:
1 mark deduction for each day of late submission without consent from the CE.
Penalty may also accrue for failure to register by the deadline.
4. Registration
You are required to join the trading session named BFC3340 on StockTrak. You need to register by 5pm Friday of Teaching Week 5. Make sure to register by the due date to avoid penalties.
How to join
1. Go to https://www.stocktrak.com:443/members/register?session=BFC3340
2. Complete the form using your name as it appears on Moodle, and university email. For login information, you can choose your username and password, but be sure to use Monash
student email for field “Email Address”.
5. Learning to trade in StockTrak
- StockTrak Student User Guide is the starting place to learn about StockTrak.
- StockTrak has a series of videos to help you navigate around the platform and trade. The following videos are must-watch:
o Trading Options
o Trading Option Spreads
o Order types videos(Limit Buy, Limit Sell, Stop, Trailing Stop)
o Manage Portfolio
o Research Tools
- Tutorial 5 will provide substantial additional guidance, including a trade walkthrough.
6. Trade selection
Option trading typically falls into two main categories: directional trading and volatility trading. Directional trading makes a bet on whether a stock will go up or down over the selected horizon (strategies include: bull spread, bear spread). Volatility trading makes a bet on whether the volatility of a stock will go up or down over the selected horizon (strategies include: straddle, strangle, butterfly spread). Outside these categories, short out-of-the-money put is another potentially viable strategy as it benefits from people seeking downside protection. Naked option positions such as long call and long put bet on both direction and volatility, which are harder to make profit and also more risky, hence should be avoided.
With this background in mind, together with your finance knowledge, conduct your own research to identify trading opportunities and formulate an option trade accordingly.
7. Research and data gathering
The following sources are useful for your research and data gathering for the trade analyses
StockTrak: Under Investing Research
. Historical stock price chart and download. Intra-day data not available
. Fundamental information (eg earnings)
. Latest prices of all option chains, and their greeks
Yahoo Finance
. Same as StockTrak plus intraday data for latest trading day.
Barchart.com
. Similar to above sources.
. Option data also includes historical volatility, which can be useful for screening option strategies.
8. StockTrak Support
If you need technical support related to the platform, there is a Live Chat widget when using the platform. Here is what they say about their Live Chat feature:
Our agents are standing by in case you have any questions, and you can find this on any page of our site.If you are outside our normal business hours, you can also leave a message and our team will respond within 1 business day.
9. Frequently asked questions
Do I need to match the time stamp of the option price and the spot price?
The trade price of an option at a given time should reflect the price of the underlying asset around that time. Therefore, for your Greek calculation, the spot price to be used should be the spot price around the time of the option trade. For example, if you use an TSLA option price at 3:56 pm Thursday Eastern Time, you should try to find the stock price for TSLA around that time. Yahoo! Finance does provide intraday prices but you can only view the prices of the most recent day. This means as soon as your trade goes through, you need to go to Yahoo! Finance to look up the spot price.
Can I make more than 1 roundtrip trade?
Yes, you can. Feel free to have fun with the platform. Select one trade for the trade journal.
Is there a position limit?
A position limit of 10% of your initial capital is imposed, meaning each position cannot exceed 10% of your portfolio value. This is to ensure you do not get wiped out by a big trade that goes wrong.
How many contracts should I trade?
There is no restriction other than the 10% position limit above. But it is a good practice to size a trade such that the worst loss does not exceed 2% of your portfolio.
Can I use the implied volatility and/or Greek values supplied by StockTrak or any third party?
The purpose of the exercise is to get your hands dirty. You will see that to get those numbers require a bit of research and number crunching. So the answer is no. You have to compute those numbers yourself and show the calculation in your trade journal.
2023-09-06