|Author||Topic: How to gain analytical skills|
|I've kind of known this for a while but I think now is the time for me to change things.
Basically, the way I approached learning in the past relied solely on rote learning, now however, I have realized it's time to change and become more analytical. I was wondering, how you might suggest I go about this? I'm pretty hopeless at the moment and don't know how to get better.
|One approach I found helpful in the past when dealing with concepts that seemed very abstract at first, was to make them more relatable by trying to create applications out of my daily life. An example: the put-call parity, defined as:
Price of Underlying + Put Price = discounted Strike Price + Call Price
This sounds very abstract at first (unless you trade options on a regular basis), so I tried to make it more relatable for myself.
Left side is called a Protective put. Now I imagine that I am currently planning to buy a house (which is kind of true actually, probably more next year but I am digressing), then I would really love to have some kind of insurance in case the house value (Price of the underlying) drops after I buy the house. So buying a put option would limit that downsize risk, I would have the right to sell the house at a certain price, so if it falls below that value I am not affected (think of the burst of the 2008 house price bubble).
Right Hand Side is called a fiduciary call. Say I actually did find a house but I am short 10% of the purchase price (which is not true but indulge my fantasy here for a second) and my credit score is so bad, that no bank will lend me the 10% that is missing. Now I am worried if I wait a year to save up the missing 10% the house price might increase (I am seriously worried about that, but I am digressing again). So I put my money on a savings acount earning 10% per year, and I buy a call option that gives me the right to buy the house in a year from now at that price, so if the price increases indeed, I am not affected.
Now I just try to memorize that these two need to be equivalent, that way there is less to remember (on a side note: Exhibit 14 in Reading 59 shows you why the have to be equivalent, the payoffs are the same).