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v t e

In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price (the strike).^[1] The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the corresponding obligation to fulfill the transaction. The price of an option derives from the difference between the reference price and the value of the underlying asset (commonly a stock, a bond, a currency or a futures contract) plus a premium based on the time remaining until the expiration of the option. Other types of options exist, and options can in principle be created for any type of valuable asset.

An option which conveys the right to buy something at a specific price is called a call; an option which conveys the right to sell something at a specific price is called a put. The reference price at which the underlying asset may be traded is called the strike price or exercise price. The process of activating an option and thereby trading the underlying asset at the agreed-upon price is referred to as exercising it. Most options have an expiration date. If the option is not exercised by the expiration date, it becomes void and worthless.^[1]

In return for assuming the obligation, called writing the option, the originator of the option collects a payment, the premium, from the buyer. The writer of an option must make good on delivering (or receiving) the underlying asset or its cash equivalent, if the option is exercised.

An option can usually be sold by its original buyer to another party. Many options are created in standardized form and traded on an anonymous options exchange among the general public, while other over-the-counter options are customized ad hoc to the desires of the buyer, usually by an investment bank.^[2][3]

Contract specifications[link]

Every financial option is a contract between the two counterparties with the terms of the option specified in a term sheet. Option contracts may be quite complicated; however, at minimum, they usually contain the following specifications:^[4]

• whether the option holder has the right to buy (a call option) or the right to sell (a put option)
• the quantity and class of the underlying asset(s) (e.g., 100 shares of XYZ Co. B stock)
• the strike price, also known as the exercise price, which is the price at which the underlying transaction will occur upon exercise
• the expiration date, or expiry, which is the last date the option can be exercised
• the settlement terms, for instance whether the writer must deliver the actual asset on exercise, or may simply tender the equivalent cash amount
• the terms by which the option is quoted in the market to convert the quoted price into the actual premium – the total amount paid by the holder to the writer

Types[link]

The Options can be classified into following types:

Exchange-traded options[link]

• Exchange-traded options (also called "listed options") are a class of exchange-traded derivatives. Exchange traded options have standardized contracts, and are settled through a clearing house with fulfillment guaranteed by the credit of the exchange. Since the contracts are standardized, accurate pricing models are often available. Exchange-traded options include:^[5][6]
  • stock options,
  • bond options and other interest rate options
  • stock market index options or, simply, index options and
  • options on futures contracts
  • callable bull/bear contract

Over-the-counter[link]

• Over-the-counter options (OTC options, also called "dealer options") are traded between two private parties, and are not listed on an exchange. The terms of an OTC option are unrestricted and may be individually tailored to meet any business need. In general, at least one of the counterparties to an OTC option is a well-capitalized institution. Option types commonly traded over the counter include:

1. interest rate options
2. currency cross rate options, and
3. options on swaps or swaptions.

Other option types[link]

Another important class of options, particularly in the U.S., are employee stock options, which are awarded by a company to their employees as a form of incentive compensation. Other types of options exist in many financial contracts, for example real estate options are often used to assemble large parcels of land, and prepayment options are usually included in mortgage loans. However, many of the valuation and risk management principles apply across all financial options.

Option styles[link]

Naming conventions are used to help identify properties common to many different types of options. These include:

• European option – an option that may only be exercised on expiration.
• American option – an option that may be exercised on any trading day on or before expiry.
• Bermudan option – an option that may be exercised only on specified dates on or before expiration.
• Barrier option – any option with the general characteristic that the underlying security's price must pass a certain level or "barrier" before it can be exercised.
• Exotic option – any of a broad category of options that may include complex financial structures.^[7]
• Vanilla option – any option that is not exotic.

Valuation models[link]

The value of an option can be estimated using a variety of quantitative techniques based on the concept of risk neutral pricing and using stochastic calculus. The most basic model is the Black–Scholes model. More sophisticated models are used to model the volatility smile. These models are implemented using a variety of numerical techniques.^[8] In general, standard option valuation models depend on the following factors:

• The current market price of the underlying security,
• the strike price of the option, particularly in relation to the current market price of the underlying (in the money vs. out of the money),
• the cost of holding a position in the underlying security, including interest and dividends,
• the time to expiration together with any restrictions on when exercise may occur, and
• an estimate of the future volatility of the underlying security's price over the life of the option.

More advanced models can require additional factors, such as an estimate of how volatility changes over time and for various underlying price levels, or the dynamics of stochastic interest rates.

The following are some of the principal valuation techniques used in practice to evaluate option contracts.

Black–Scholes[link]

Following early work by Louis Bachelier and later work by Edward O. Thorp, Fischer Black and Myron Scholes made a major breakthrough by deriving a differential equation that must be satisfied by the price of any derivative dependent on a non-dividend-paying stock. By employing the technique of constructing a risk neutral portfolio that replicates the returns of holding an option, Black and Scholes produced a closed-form solution for a European option's theoretical price.^[9] At the same time, the model generates hedge parameters necessary for effective risk management of option holdings. While the ideas behind the Black–Scholes model were ground-breaking and eventually led to Scholes and Merton receiving the Swedish Central Bank's associated Prize for Achievement in Economics (a.k.a., the Nobel Prize in Economics),^[10] the application of the model in actual options trading is clumsy because of the assumptions of continuous (or no) dividend payment, constant volatility, and a constant interest rate. Nevertheless, the Black–Scholes model is still one of the most important methods and foundations for the existing financial market in which the result is within the reasonable range.^[11]

Stochastic volatility models[link]

Since the market crash of 1987, it has been observed that market implied volatility for options of lower strike prices are typically higher than for higher strike prices, suggesting that volatility is stochastic, varying both for time and for the price level of the underlying security. Stochastic volatility models have been developed including one developed by S.L. Heston.^[12] One principal advantage of the Heston model is that it can be solved in closed-form, while other stochastic volatility models require complex numerical methods.^[12]

Model implementation[link]

Once a valuation model has been chosen, there are a number of different techniques used to take the mathematical models to implement the models.

Analytic techniques[link]

In some cases, one can take the mathematical model and using analytical methods develop closed form solutions such as Black–Scholes and the Black model. The resulting solutions are readily computable, as are their "Greeks". Although the Roll-Geske-Whaley model applies to an American call with one dividend, for other cases of American options, closed form solutions are not available.

Binomial tree pricing model[link]

Closely following the derivation of Black and Scholes, John Cox, Stephen Ross and Mark Rubinstein developed the original version of the binomial options pricing model.^{[13] [14]} It models the dynamics of the option's theoretical value for discrete time intervals over the option's life. The model starts with a binomial tree of discrete future possible underlying stock prices. By constructing a riskless portfolio of an option and stock (as in the Black–Scholes model) a simple formula can be used to find the option price at each node in the tree. This value can approximate the theoretical value produced by Black Scholes, to the desired degree of precision. However, the binomial model is considered more accurate than Black–Scholes because it is more flexible; e.g., discrete future dividend payments can be modeled correctly at the proper forward time steps, and American options can be modeled as well as European ones. Binomial models are widely used by professional option traders. The Trinomial tree is a similar model, allowing for an up, down or stable path; although considered more accurate, particularly when fewer time-steps are modelled, it is less commonly used as its implementation is more complex.

Monte Carlo models[link]

For many classes of options, traditional valuation techniques are intractable because of the complexity of the instrument. In these cases, a Monte Carlo approach may often be useful. Rather than attempt to solve the differential equations of motion that describe the option's value in relation to the underlying security's price, a Monte Carlo model uses simulation to generate random price paths of the underlying asset, each of which results in a payoff for the option. The average of these payoffs can be discounted to yield an expectation value for the option.^[15] Note though, that despite its flexibility, using simulation for American styled options is somewhat more complex than for lattice based models.

Finite difference models[link]

The equations used to model the option are often expressed as partial differential equations (see for example Black–Scholes equation). Once expressed in this form, a finite difference model can be derived, and the valuation obtained. A number of implementations of finite difference methods exist for option valuation, including: explicit finite difference, implicit finite difference and the Crank-Nicholson method. A trinomial tree option pricing model can be shown to be a simplified application of the explicit finite difference method. Although the finite difference approach is mathematically sophisticated, it is particularly useful where changes are assumed over time in model inputs – for example dividend yield, risk free rate, or volatility, or some combination of these – that are not tractable in closed form.

Other models[link]

Other numerical implementations which have been used to value options include finite element methods. Additionally, various short rate models have been developed for the valuation of interest rate derivatives, bond options and swaptions. These, similarly, allow for closed-form, lattice-based, and simulation-based modelling, with corresponding advantages and considerations.

Risks[link]

As with all securities, trading options entails the risk of the option's value changing over time. However, unlike traditional securities, the return from holding an option varies non-linearly with the value of the underlying and other factors. Therefore, the risks associated with holding options are more complicated to understand and predict.

In general, the change in the value of an option can be derived from Ito's lemma as:

Failed to parse (Missing texvc executable; please see math/README to configure.): dC=\Delta dS + \Gamma \frac{dS^2}{2} + \kappa d\sigma + \theta dt \,

where the Greeks Failed to parse (Missing texvc executable; please see math/README to configure.): \Delta , Failed to parse (Missing texvc executable; please see math/README to configure.): \Gamma , Failed to parse (Missing texvc executable; please see math/README to configure.): \kappa

and Failed to parse (Missing texvc executable; please see math/README to configure.): \theta
are the standard hedge parameters calculated from an option valuation model, such as Black–Scholes, and Failed to parse (Missing texvc executable; please see math/README to configure.): dS

, Failed to parse (Missing texvc executable; please see math/README to configure.): d\sigma

and Failed to parse (Missing texvc executable; please see math/README to configure.): dt
are unit changes in the underlying's price, the underlying's volatility and time, respectively.

Thus, at any point in time, one can estimate the risk inherent in holding an option by calculating its hedge parameters and then estimating the expected change in the model inputs, Failed to parse (Missing texvc executable; please see math/README to configure.): dS , Failed to parse (Missing texvc executable; please see math/README to configure.): d\sigma

and Failed to parse (Missing texvc executable; please see math/README to configure.): dt

, provided the changes in these values are small. This technique can be used effectively to understand and manage the risks associated with standard options. For instance, by offsetting a holding in an option with the quantity Failed to parse (Missing texvc executable; please see math/README to configure.): -\Delta

of shares in the underlying, a trader can form a delta neutral portfolio that is hedged from loss for small changes in the underlying's price. The corresponding price sensitivity formula for this portfolio Failed to parse (Missing texvc executable; please see math/README to configure.): \Pi
is:

Failed to parse (Missing texvc executable; please see math/README to configure.): d\Pi=\Delta dS + \Gamma \frac{dS^2}{2} + \kappa d\sigma + \theta dt = \Gamma \frac{dS^2}{2} + \kappa d\sigma + \theta dt\,

Example[link]

A call option expiring in 99 days on 100 shares of XYZ stock is struck at $50, with XYZ currently trading at $48. With future realized volatility over the life of the option estimated at 25%, the theoretical value of the option is $1.89. The hedge parameters Failed to parse (Missing texvc executable; please see math/README to configure.): \Delta , Failed to parse (Missing texvc executable; please see math/README to configure.): \Gamma , Failed to parse (Missing texvc executable; please see math/README to configure.): \kappa , Failed to parse (Missing texvc executable; please see math/README to configure.): \theta

are (0.439, 0.0631, 9.6, and −0.022), respectively. Assume that on the following day, XYZ stock rises to $48.5 and volatility falls to 23.5%. We can calculate the estimated value of the call option by applying the hedge parameters to the new model inputs as:

Failed to parse (Missing texvc executable; please see math/README to configure.): dC = (0.439 \cdot 0.5) + \left(0.0631 \cdot \frac{0.5^2}{2} \right) + (9.6 \cdot -0.015) + (-0.022 \cdot 1) = 0.0614

Under this scenario, the value of the option increases by $0.0614 to $1.9514, realizing a profit of $6.14. Note that for a delta neutral portfolio, whereby the trader had also sold 44 shares of XYZ stock as a hedge, the net loss under the same scenario would be ($15.86).

Pin risk[link]

A special situation called pin risk can arise when the underlying closes at or very close to the option's strike value on the last day the option is traded prior to expiration. The option writer (seller) may not know with certainty whether or not the option will actually be exercised or be allowed to expire worthless. Therefore, the option writer may end up with a large, unwanted residual position in the underlying when the markets open on the next trading day after expiration, regardless of his or her best efforts to avoid such a residual.

Counterparty risk[link]

A further, often ignored, risk in derivatives such as options is counterparty risk. In an option contract this risk is that the seller won't sell or buy the underlying asset as agreed. The risk can be minimized by using a financially strong intermediary able to make good on the trade, but in a major panic or crash the number of defaults can overwhelm even the strongest intermediaries.

Trading[link]

The most common way to trade options is via standardized options contracts that are listed by various futures and options exchanges. ^[16] Listings and prices are tracked and can be looked up by ticker symbol. By publishing continuous, live markets for option prices, an exchange enables independent parties to engage in price discovery and execute transactions. As an intermediary to both sides of the transaction, the benefits the exchange provides to the transaction include:

• fulfillment of the contract is backed by the credit of the exchange, which typically has the highest rating (AAA),
• counterparties remain anonymous,
• enforcement of market regulation to ensure fairness and transparency, and
• maintenance of orderly markets, especially during fast trading conditions.

Over-the-counter options contracts are not traded on exchanges, but instead between two independent parties. Ordinarily, at least one of the counterparties is a well-capitalized institution. By avoiding an exchange, users of OTC options can narrowly tailor the terms of the option contract to suit individual business requirements. In addition, OTC option transactions generally do not need to be advertised to the market and face little or no regulatory requirements. However, OTC counterparties must establish credit lines with each other, and conform to each others clearing and settlement procedures.

With few exceptions,^[17] there are no secondary markets for employee stock options. These must either be exercised by the original grantee or allowed to expire worthless.

The basic trades of traded stock options (American style)[link]

These trades are described from the point of view of a speculator. If they are combined with other positions, they can also be used in hedging. An option contract in US markets usually represents 100 shares of the underlying security.^[18]

Long call[link]

Payoff from buying a call.

A trader who believes that a stock's price will increase might buy the right to purchase the stock (a call option) rather than just purchase the stock itself. He would have no obligation to buy the stock, only the right to do so until the expiration date. If the stock price at expiration is above the exercise price by more than the premium (price) paid, he will profit. If the stock price at expiration is lower than the exercise price, he will let the call contract expire worthless, and only lose the amount of the premium. A trader might buy the option instead of shares, because for the same amount of money, he can control (leverage) a much larger number of shares.

Long put[link]

Payoff from buying a put.

A trader who believes that a stock's price will decrease can buy the right to sell the stock at a fixed price (a put option). He will be under no obligation to sell the stock, but has the right to do so until the expiration date. If the stock price at expiration is below the exercise price by more than the premium paid, he will profit. If the stock price at expiration is above the exercise price, he will let the put contract expire worthless and only lose the premium paid.

Short call[link]

Payoff from writing a call.

A trader who believes that a stock price will decrease can sell the stock short or instead sell, or "write," a call. The trader selling a call has an obligation to sell the stock to the call buyer at the buyer's option. If the stock price decreases, the short call position will make a profit in the amount of the premium. If the stock price increases over the exercise price by more than the amount of the premium, the short will lose money, with the potential loss unlimited.

Short put[link]

Payoff from writing a put.

A trader who believes that a stock price will increase can buy the stock or instead sell, or "write", a put. The trader selling a put has an obligation to buy the stock from the put buyer at the put buyer's option. If the stock price at expiration is above the exercise price, the short put position will make a profit in the amount of the premium. If the stock price at expiration is below the exercise price by more than the amount of the premium, the trader will lose money, with the potential loss being up to the full value of the stock. A benchmark index for the performance of a cash-secured short put option position is the CBOE S&P 500 PutWrite Index (ticker PUT).

Option strategies[link]

Payoffs from buying a butterfly spread.

Payoffs from selling a straddle.

Payoffs from a covered call.

Combining any of the four basic kinds of option trades (possibly with different exercise prices and maturities) and the two basic kinds of stock trades (long and short) allows a variety of options strategies. Simple strategies usually combine only a few trades, while more complicated strategies can combine several.

Strategies are often used to engineer a particular risk profile to movements in the underlying security. For example, buying a butterfly spread (long one X1 call, short two X2 calls, and long one X3 call) allows a trader to profit if the stock price on the expiration date is near the middle exercise price, X2, and does not expose the trader to a large loss.

An Iron condor is a strategy that is similar to a butterfly spread, but with different strikes for the short options – offering a larger likelihood of profit but with a lower net credit compared to the butterfly spread.

Selling a straddle (selling both a put and a call at the same exercise price) would give a trader a greater profit than a butterfly if the final stock price is near the exercise price, but might result in a large loss.

Similar to the straddle is the strangle which is also constructed by a call and a put, but whose strikes are different, reducing the net debit of the trade, but also reducing the risk of loss in the trade.

One well-known strategy is the covered call, in which a trader buys a stock (or holds a previously-purchased long stock position), and sells a call. If the stock price rises above the exercise price, the call will be exercised and the trader will get a fixed profit. If the stock price falls, the call will not be exercised, and any loss incurred to the trader will be partially offset by the premium received from selling the call. Overall, the payoffs match the payoffs from selling a put. This relationship is known as put-call parity and offers insights for financial theory. A benchmark index for the performance of a buy-write strategy is the CBOE S&P 500 BuyWrite Index (ticker symbol BXM).

Historical uses of options[link]

Contracts similar to options are believed to have been used since ancient times. In the real estate market, call options have long been used to assemble large parcels of land from separate owners; e.g., a developer pays for the right to buy several adjacent plots, but is not obligated to buy these plots and might not unless he can buy all the plots in the entire parcel. Film or theatrical producers often buy the right — but not the obligation — to dramatize a specific book or script. Lines of credit give the potential borrower the right — but not the obligation — to borrow within a specified time period.

Many choices, or embedded options, have traditionally been included in bond contracts. For example many bonds are convertible into common stock at the buyer's option, or may be called (bought back) at specified prices at the issuer's option. Mortgage borrowers have long had the option to repay the loan early, which corresponds to a callable bond option.

In London, puts and "refusals" (calls) first became well-known trading instruments in the 1690s during the reign of William and Mary.^[19]

Privileges were options sold over the counter in nineteenth century America, with both puts and calls on shares offered by specialized dealers. Their exercise price was fixed at a rounded-off market price on the day or week that the option was bought, and the expiry date was generally three months after purchase. They were not traded in secondary markets.

Supposedly the first option buyer in the world was the ancient Greek mathematician and philosopher Thales of Miletus. On a certain occasion, it was predicted that the season's olive harvest would be larger than usual, and during the off-season he acquired the right to use a number of olive presses the following spring. When spring came and the olive harvest was larger than expected he exercised his options and then rented the presses out at much higher price than he paid for his 'option'.^[20][21]

See also[link]

• American Stock Exchange
• Chicago Board Options Exchange
• Eurex
• Euronext.liffe
• International Securities Exchange
• NYSE Arca
• Philadelphia Stock Exchange
• LEAPS (finance)
• Real options analysis
• PnL Explained

References[link]

Further reading[link]

• Fischer Black and Myron S. Scholes. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, 81 (3), 637–654 (1973).
• Feldman, Barry and Dhuv Roy. "Passive Options-Based Investment Strategies: The Case of the CBOE S&P 500 BuyWrite Index." The Journal of Investing, (Summer 2005).
• Kleinert, Hagen, Path Integrals in Quantum Mechanics, Statistics, Polymer Physics, and Financial Markets, 4th edition, World Scientific (Singapore, 2004); Paperback ISBN 981-238-107-4 (also available online: PDF-files)
• Hill, Joanne, Venkatesh Balasubramanian, Krag (Buzz) Gregory, and Ingrid Tierens. "Finding Alpha via Covered Index Writing." Financial Analysts Journal. (Sept.-Oct. 2006). pp. 29–46.
• Moran, Matthew. “Risk-adjusted Performance for Derivatives-based Indexes – Tools to Help Stabilize Returns.” The Journal of Indexes. (Fourth Quarter, 2002) pp. 34 – 40.
• Reilly, Frank and Keith C. Brown, Investment Analysis and Portfolio Management, 7th edition, Thompson Southwestern, 2003, pp. 994–5.
• Schneeweis, Thomas, and Richard Spurgin. "The Benefits of Index Option-Based Strategies for Institutional Portfolios" The Journal of Alternative Investments, (Spring 2001), pp. 44 – 52.
• Whaley, Robert. "Risk and Return of the CBOE BuyWrite Monthly Index" The Journal of Derivatives, (Winter 2002), pp. 35 – 42.
• Bloss, Michael; Ernst, Dietmar; Häcker Joachim (2008): Derivatives – An authoritative guide to derivatives for financial intermediaries and investors Oldenbourg Verlag München ISBN 978-3-486-58632-9
• Espen Gaarder Haug & Nassim Nicholas Taleb (2008): "Why We Have Never Used the Black–Scholes–Merton Option Pricing Formula"

External links[link]

• Robert Shiller: Video lecture about Option Markets
• List of equities with options

Look up option in Wiktionary, the free dictionary.

Option may refer to:

Legal rights[link]

• Option (finance), an instrument that conveys the right, but not the obligation, to engage in a future transaction (for example, on some underlying security or on a parcel of real property), or in a futures contract
• Option (law), the legal underpinning of a financial option
• Option contract, a type of legal contract
• Option (filmmaking), a contractual agreement between a film producer and a writer, in which the producer obtains the right to buy a screenplay from the writer before a certain date.

Sport[link]

• Option run, a play in American and Canadian football
• Option offense, an offensive scheme in American football primarily predicated on option runs
• Option (baseball), a type of player transaction

Computing[link]

• Option key, a key on Apple computer keyboards
• Option type, a polymorphic data type in programming languages
• Command-line option, an optional parameter to a command

Publications[link]

• Option (car magazine), a Japanese car magazine
• Option (music magazine), a defunct American music magazine

History[link]

• "The Option", an alternate name for the South Tyrol Option Agreement, a resettlement program of German speakers living in Italy initiated by Adolf Hitler and Benito Mussolini

Entertainment[link]

• OPTION unit, a fictional weapons platform for the Vic Viper in the Gradius series of video games
  • Option (オプション, opushun^?), a catch-all term for similar satellite weapon units which orbit some sort of main unit, appearing in various Japanese video games
• "Options", a song by Pedro the Lion from his 2007 album Control
• Options (Welcome to Paradox), an episode of Welcome to Paradox
• Options (novel), a novel by Robert Sheckley

Organisations[link]

• Option N.V., a company providing wireless technology solutions

This disambiguation page lists articles associated with the same title. If an internal link led you here, you may wish to change the link to point directly to the intended article.

Jim Cramer
Born	James J. Cramer[1] (1955-02-10) February 10, 1955 (age 57)[2] Wyndmoor, Pennsylvania, U.S.
Residence	Summit, New Jersey[3]
Alma mater	Harvard College (B.A.) Harvard Law School (J.D.)
Occupation	Television personality, author
Years active	1978–present
Known for	Hosting Mad Money Chairman of TheStreet.com, Inc., CNBC anchor, author
Spouse	Karen Backfisch-Olufsen

James "Jim" J. Cramer (born February 10, 1955) is an American television personality, a former hedge fund manager, and a best-selling author. Cramer is the host of CNBC's Mad Money and a co-founder and chairman of TheStreet.com, Inc.

Family[link]

Cramer married Karen Backfisch-Olufsen, a trader, in 1988,^{[citation needed]} and lives in Summit, New Jersey.^[4]

Early years[link]

Cramer was born to Jewish parents^[5] in Wyndmoor, Pennsylvania, a suburb of Philadelphia.^[6] One of his first jobs was selling ice cream at Veterans Stadium during Philadelphia Phillies games.^[7] Cramer went to Springfield Township High School in Montgomery County.^[8]

Biography[link]

Education and early career[link]

Cramer graduated magna cum laude from Harvard College with a B.A. in government.^[7]

He began his involvement with journalism in college, working for The Harvard Crimson, and rising to become its president. After graduation, Cramer worked in several entry-level reporting jobs. Dating back to March 1, 1978, Cramer worked for the Tallahassee Democrat in Tallahassee, Florida, where he covered the Ted Bundy murders. The then-executive editor, Richard Oppel, says "[Cramer] was like a driving ram. He was great at getting the story."^[9] He then worked as a journalist for The Los Angeles Herald Examiner. Around this time, his apartment was robbed and he was left with nothing more than his car and the things in it; he lived out of his car for about nine months.^{[citation needed]} He also worked for Governor Jerry Brown.^[6]

Cramer was one of the first reporters at American Lawyer.^[10] Cramer later earned a Juris Doctor degree from Harvard Law School.^[7] During his years at Harvard Law School, Cramer worked as a research assistant for Alan Dershowitz. He assisted Dershowitz's campaign to acquit alleged murderer Claus von Bülow despite the fact that Cramer admitted to himself that von Bülow was "supremely guilty".^[11] Cramer was admitted to the New York Bar in 1985, but his Bar status is currently listed as "suspended." ^[12]

Investing[link]

Cramer started investing in the stock market during his time at law school.^[6] Cramer began promoting his holdings by leaving stock picks on his answering machine, impressing The New Republic owner Martin Peretz, who gave him $500,000 to invest; Cramer earned Peretz $150,000 in two years.^[9]

His track record helped Cramer obtain employment in 1984 as a stock broker with Goldman Sachs' Private Wealth Management^[13] division. Cramer's success in this position led him to found his own hedge fund, Cramer & Co. (later Cramer, Berkowitz, & Co.), in 1987. The fund operated out of the offices of hedge fund pioneer Michael Steinhardt's Steinhardt, Fine, Berkowitz & Co., and early investors included Eliot Spitzer (a Harvard classmate, one of his oldest friends, and former Governor of New York who resigned),^[14] Brill, and Peretz.^[15]

During Cramer's tenure of the fund, from 1988–2000, he had one year of negative returns in 1998. The following year in 1999 the fund returned 47%, and in 2000 28%, beating the S&P 500 by 38 percentage points.^[9] Cramer retired from his hedge fund in 2001, finishing with a 24% average annual return over 14 years and having "routinely [taken] home $10 million a year and more."^[9] The fund was taken over by his former partner Jeff Berkowitz after Cramer's retirement. During that time, he was also an "editor at large" for Smart Money magazine, and was accused of unethically combining his investing and reporting activities when he bought more of stocks that he recommended just before the recommendation article came out, contributing to a $2 million personal gain.^[16] Today, Cramer is barred by CNBC from trading stocks with his personal funds although he makes picks and sells his recommendations.

In 1996, Cramer co-founded TheStreet.com, Inc. with The New Republic editor Martin Peretz, one of his hedge fund's original clients. Cramer is currently a market commentator and adviser to the TheStreet.com, and is its second largest shareholder.^[1] Cramer also manages a charitable trust stock portfolio which is tied to TheStreet.com through a paid subscription service called the Action Alerts PLUS Portfolio.^[9]

Cramer currently works on a new project as part of TheStreet.com called MainStreet.com.^{[citation needed]} An earlier project, TheRoad.com, was not successful.^{[citation needed]}

Cramer claimed to be worth $50 to $100 million in October 2005.^[9] In 2009, Cramer received earnings of $461,276 from TheStreet.com.^[1]

Television personality[link]

The cable television program Mad Money with Jim Cramer first aired on CNBC in 2005. According to CNBC's Web site in an article titled, "Mad Money Manifesto" by Jim Cramer, the show's mission statement and Cramer's job

"...is not to tell you what to think, but to teach you how to think about the market like a pro. This show is not about picking stocks. It's not about giving you tips that will make you money overnight – tips are for waiters. Our mission is educational, to teach you how to analyze stocks and the market through the prism of events."

To provide viewers with "the knowledge and the tools that will empower you to be a better investor," Mad Money features many segments, including: The Lightning Round, Game Plan, Execution Decision, Off the Charts, Sell Block, Market Marshmallows, Outrage of the Day, Mad Bull Disease, Am I Diversified, and Mad Mail.^[17]

After being a frequent guest commentator on CNBC in the late 1990s, Cramer co-hosted CNBC shows America Now and Kudlow & Cramer with Lawrence Kudlow in the early 2000s.

Cramer hosted a one-hour radio show, Jim Cramer's Real Money, until December 2006. "Take the money and run" by the Steve Miller Band was the opening intro to each of his radio shows. The show was similar to his Mad Money TV show. He also guest-hosted in the slot caused by the cancellation of Imus in the Morning (MSNBC and WFAN/Westwood One) in May 2007.

On November 13, 2005, Dan Rather did a sit-down interview with Cramer on 60 Minutes. Among the topics of discussion were Cramer's past at his hedge fund; for example, his violent temper, and what finally led him to come to his senses and "calm down."^{[citation needed]} Footage of Cramer at his family home with his daughters and wife was also included.^{[citation needed]} On November 15, 2005, Cramer mentioned on his program that he received hundreds of e-mails after his 60 Minutes interview. This report was taped before Cramer's radio show, Smart Money with Jim Cramer moved to WOR and became syndicated under the CBS Radio banner.

In 2005, Cramer appeared as himself in two episodes of the television series Arrested Development. He appeared to first announce that he had upgraded Bluth Company stock to a "Don't Buy" from a "Triple Sell", and then to say that the stock was not a "Don't Buy" anymore, but a "Risky".

Cramer has also made appearances on NBC's Today, NBC Nightly News, Live with Regis and Kelly, ESPN Classic's Cheap Seats, NBC's Late Night With Conan O'Brien, Comedy Central's The Daily Show with Jon Stewart, The Tonight Show with Jay Leno, Late Show with David Letterman, ABC's Jimmy Kimmel Live and NBC's The Apprentice (U.S. Season 7) called "The Celebrity Apprentice".

Cramer also appeared in the 2008 motion picture Iron Man spoofing Stark Industries on his show Mad Money.^[18] and appears in the movie Wall Street: Money Never Sleeps.^[19] He also claims to have consulted for the original Wall Street movie by telling the filmmakers how he would get through to Gordon Gekko.^[20]

On March 12, 2009, Jon Stewart interviewed Cramer on The Daily Show^[21] and challenged Cramer's recommendations of Bear Stearns.

On November 3, 2009, Cramer appeared on the Martha Stewart Show to promote his new book,Getting Back to Even. While baking wholewheat bread, he stated that it is a great time to invest in real estate and that he has recently purchased the Debary Inn in Summit, NJ.^{[citation needed]}

Action Alerts charitable trust[link]

In the timeframe of 2002 until May 2009 the performance of Cramer's charitable trust "Action Alerts PLUS" outpaced the S&P 500 and the Russell 2000; while the charitable trust accumulated a return of 31.75%, the S&P 500 had a return of 18.75% and the Russell 2000 has a return of 22.51%. On an annual basis, the trust outperformed the S&P 500 by 7.35% and the Russell 2000 Index by 3.33%. Paul Bolster explains that Cramer beats the market in part because of the excess risk in his picks. “If we adjust for his market risk, we come up with an excess return that is essentially zero,” Bolster said, adding that “zero,” in this case, means his returns are roughly in line with the risk he’s taking on.^[22]

CNBC does not permit Cramer to buy or sell any security he has spoken about on CNBC for the trust for five days following the broadcast. Whenever Cramer is acting within his portfolio or important news about his stocks occur he sends out e-mails to his paying subscribers on TheStreet.com. Whenever mentioning a stock that he holds in his portfolio, he is required to disclose that he owns shares of such company on his CNBC show.^[23]

Selected controversies[link]

Fox News Channel lawsuit[link]

In 2000, Cramer settled a lawsuit with Fox News Channel in which Fox had claimed Cramer reneged on a deal to produce a show for them. Their conflict began when Fox complained that Cramer promoted TheStreet.com's stock on the air.^[24]

Market manipulation[link]

In March 2007, a December 2006 interview from TheStreet.com's "Wall Street Confidential" webcast stirred controversy after it appeared on YouTube.com.^[25] In the video, Cramer described activities used by hedge fund managers to manipulate stock prices – some of debatable legality and others illegal. He described how he could push stocks higher or lower with as little as $5 million in capital when he was running his hedge fund. Cramer said, "A lot of times when I was short at my hedge fund...When I was positioned short—meaning I needed it down—I would create a level of activity beforehand that could drive the futures." He also encouraged hedge funds to engage in this type of activity because it is "a very quick way to make money".^[26]

Cramer stated that everything he did was legal, but that illegal activity is common in the hedge fund industry as well. He also stated that some hedge fund managers spread false rumors to drive a stock down: "What's important when you are in that hedge-fund mode is to not do anything remotely truthful because the truth is so against your view, that it's important to create a new truth, to develop a fiction."^[26] Cramer described a variety of tactics that hedge fund managers use to affect a stock's price. Cramer said that one strategy to keep a stock price down is to spread false rumors to reporters he described as "the Pisanis of the world". The comment was a reference to CNBC correspondent Bob Pisani, who reports from the trading floor of the New York Stock Exchange. "You have to use these guys," said Cramer. He also discussed giving information to "the bozo reporter from The Wall Street Journal" to get an article published.^[27][28] Cramer said this practice, although illegal, is easy to do "because the SEC doesn't understand it."^[29] During the interview Cramer referred to himself as a "banking class hero."^[30]

SEC subpoena[link]

In February 2006, an investigation by the U.S. Securities and Exchange Commission (SEC) into allegations of collusion between short-sellers and a stock research firm led to the serving of subpoenas to TheStreet.com and Cramer, as well as journalists for Dow Jones and Marketwatch.com. The SEC then began to back away from the subpoenas, indicating it had no intention of enforcing them after lawyers for Dow Jones said they would not comply. SEC Chairman Christopher Cox rebuked the SEC's staff attorneys for filing subpoenas on two Dow Jones reporters without first consulting him or the other top commissioners. Cox issued a statement saying neither he nor any of the SEC's four other commissioners were aware of the subpoenas, which he called "highly unusual."^[31]

The allegations had been raised publicly and in a lawsuit against Gradient by Overstock.com chief executive Patrick M. Byrne. In May 2007, it was revealed that the SEC had subpoenaed Byrne in May 2006, in connection with an investigation of the company.^[32]

Market performance[link]

Cramer is the founder, former owner and former Senior Partner of Cramer Berkowitz, a hedge fund where Cramer reported a compounded annual "rate of return of 24% after all fees for 15 years" at Cramer Berkowitz. He retired from his hedge fund in 2001, where he finished with a self reported 36% return in 2001.^[33]

On August 3, 2007, Cramer made a plea for Federal Reserve Chairman Ben Bernanke to cut interest rates supposedly because of comments he was getting from investment banks, and their concern about adjustable-rate mortgage borrowers increasing loan rates.^[34]

On July 8, 2008, in an article on TheStreet.com entitled, "Look At The Facts"^[35] Cramer said, "The losses are increasing, the auction-rate preferreds are now biting, the mortgage implode-a-meter now measures how many home-builders are going under."

On "Hardball with Chris Matthews" for September 19, 2008, Cramer stated "It's not too late to be on the pom-pom...the sideline" in regards to home teaser loans.^[36] Cramer spoke again on the Today Show on October 6, 2008, suggesting to investors, "Whatever money you need for the next five years, please take it out of the stock market."^[37]

On September 22, 2008, Wall Street Journal best-selling author Eric Tyson, criticized Cramer's stock picks and his performance in general.^[38]

An August 20, 2007, article in Barrons stated that within the select time frame of the previous two years, "his picks haven't beaten the market. Over the past two years, viewers holding Cramer's stocks would be up 12% while the Dow rose 22% and the S&P 500 16%."^[39] CNBC disputed the magazine's findings.^[39] In a February 9, 2009, story, Barrons further reported that betting against Cramer's Buy recommendations using options in the short term could yield 25% in the initial month.^[40]

Cramer's responses to criticism[link]

The White House[link]

On March 2, 2009, Cramer drew the attention of some critics after his evaluation of President Obama’s spending plans and the administration’s handling of the banking crisis. Cramer’s name came up on March 3 during a White House press briefing after Cramer said that Obama was responsible for “the greatest wealth destruction I have seen by a president.”^[41] An offended White House shot back.^[42] Press Secretary Robert Gibbs said, "If you turn on a certain program it's geared to a very small audience. I'm not entirely sure what he's pointing to make some of the statements." When pressed further by NBC's Tom Costello, Gibbs said, "You can go back and look at any number of statements he's made in the past about the economy and wonder where some of the backup for those are, too."

On March 5, 2009, Cramer responded to the White House.^[43] He said, "Huh? Backup? Look at the incredible decline in the stock market, in all indices, since the inauguration of the president, with the drop accelerating when the budget plan came to light because of the massive fear and indecision the document sowed: Raising taxes on the eve of what could be a second Great Depression, destroying the profits in health care companies, tinkering with the mortgage deduction at a time when U.S. house price depreciation is behind much of the world's morass and certainly the devastation affecting our banks, and pushing an aggressive cap and trade program that could raise the price of energy for millions of people."

Cramer questioned criticism he received which he explained makes him "uncomfortable being in the crosshairs of columnists and comedians I enjoy."^[44] Cramer asked, "So, why after toiling in the cable wilderness for four years with Mad Money am I the target of the wrath of the Obama clan, and the darling, albeit surely momentary, of the Obama-critics? After all, my criticism of Obama's handling of the economic crisis is a lot less pointed than my withering August 2007 'They Know Nothing' meltdown^[45] against Ben Bernanke^[46] and the previous administration's handling of the economic crisis."

Frank Rich[link]

Referring to March 8, 2009, charges leveled against Cramer by New York Times columnist Frank Rich, Cramer said that he does not understand how Obama and his staff plan to raise taxes, institute cap-and-trade limitations and rework the health-care system all during a recession.^[47] The article says: "It isn’t that Cramer disagrees with Obama’s vision for the country – he even agrees with taxing the rich – but now is not the time to put those plans into action. The president needs to solve our housing, employment and financial problems, and only then turn his attention to health care and changing the mortgage deduction."

Bear Stearns recommendation[link]

On the March 11, 2008, episode of Cramer's show Mad Money, a viewer named Peter submitted the question "Should I be worried about Bear Stearns in terms of liquidity and get my money out of there?" Cramer responded "No! No! No! Bear Stearns is not in trouble. If anything, they're more likely to be taken over. Don't move your money from Bear."^[48][49] On March 14, 2008, Bear Stearns stock fell 92% on news of a Fed bailout and $2/share takeover by JPMorgan.^[50] On March 17, 2008, Cramer claimed his statements were made in regards to the liquidity of Bear Stearns brokerage accounts as opposed to Bear Stearns common stock.^[51] Cramer stated he was not recommending the common stock but allaying concerns about the account holder's liquidity held in a Bear Stearns brokerage account. Cramer later wrote about the incident: "I did tell an emailer that his deposit in his account at Bear Stearns was safe, but through a clever sound bite, (Jon) Stewart, and subsequently (Frank) Rich—neither of whom have bothered to listen to the context of the pulled quote—pass off the notion of account safety as an out-and-out buy recommendation. The absurdity astounds me. If you called Mad Money and asked me about Citigroup, I would tell you that the common stock might be worthless, but I would never tell you to pull your money out of the bank because I was worried about its solvency. Your money is safe in Citi as I said it was in Bear. The fact that I was right rankles me even more."^[52]

Michael Lewis, a journalist for the U.K.-based Evening Standard news Web site, states that TheStreet.com listed Bear Stearns as a "Buy" at $62 per share on March 11, 2008, which was the same day as the caller's question and a day before the collapse of Bear Stearns.^[53] However, TheStreet.com^[54]--the web site quote that shows the ratings history for actual changes that Cramer makes—indicates that Cramer changed Bear Stearns rating to a "Sell" on February 5, 2008. On his March 12, 2009 appearance on the Daily Show, Cramer admitted he made mistakes on his Bear Stearns calls.^[55]

Jon Stewart[link]

On March 12, 2009, Cramer appeared on The Daily Show with Jon Stewart.^[56] Stewart reiterated earlier claims regarding the CNBC host's "silly and/or embarrassing and/or stupid financial observations."^[57] Moreover, he claimed CNBC shirked its journalistic duty by believing corporate lies, rather than being an investigative "powerful tool of illumination."^[58] For his part, Cramer disagreed with Stewart on a few points, but acknowledged that he could have done a better job foreseeing the economic collapse: "We all should have seen it more." ^[59]

Stewart also discussed how short-selling was detrimental to the markets and investors. Cramer admitted to Stewart that short-selling was detrimental, stated his opposition to it, and claimed that he had never engaged in it, which contradicts earlier statements in which he described going short while managing a hedge fund. In a December 2006 interview from TheStreet.com's "Wall Street Confidential" webcast Cramer said, "A lot of times when I was short at my hedge fund...When I was positioned short—meaning I needed it down—I would create a level of activity beforehand that could drive the futures."^[26] He said, "I will say this: I am trying to expose this stuff, exactly what you guys do, and I've been trying to get the regulators to look at it."^[60] However, Stewart played several video clips from 2006 where Cramer discussed the spreading of false rumors to drive down stock prices and encouraged short-selling by hedge funds as a means to generate returns.^[61] At one point in a clip from December 22, 2006 he said, "I would encourage anyone in a hedge fund to do it." He called it a very quick way to make money and very satisfying. He continued, "By the way, no one else in the world would ever admit that, but I don't care, and again, I'm not gonna say it on TV." ^[59] Stewart responded, "I want the Jim Cramer on CNBC to protect me from that Jim Cramer."^[59] Cramer again admitted that he can do better, and that he should try to change. The interview ended when Stewart pointedly suggested: “Maybe we can remove the ‘financial expert’ and the ‘In Cramer We Trust’ and start getting back to fundamentals on the reporting, as well, and I can go back to making fart noises and funny faces.” Cramer responded: “I think we make that deal right here.”^[62]

Response to pundits[link]

"The pundits," Cramer explained on March 9, 2009, in a MainStreet article, "who haven't paid attention to anything I have been saying or writing for the past 18 months are all over me."^[63] Cramer said the pundits "won't engage in the merits of, say, favoring Tier 1 capital for the banks vs. common equity, or forbearing on the banks to work the situation out over time because the banks can be profitable if we have some patience. They just attack me."^[64] Cramer suggested, "It's time to get serious. It's time to take the issue from the pundits and from the left and right, and put it where it belongs: serious non-ideological debate to put out the real firestorm, the collapse of the economy from Wall Street to Main Street and the ensuing Great Wealth Destruction for all."

Bibliography[link]

• Jim Cramer's Getting Back to Even ISBN 978-1-4391-5801-2
• Jim Cramer's Stay Mad for Life: Get Rich, Stay Rich (Make Your Kids Even Richer) ISBN 978-1-4165-5885-9
• Jim Cramer's Mad Money: Watch TV, Get Rich ISBN 1-4165-3790-2
• Jim Cramer's Real Money: Sane Investing in an Insane World ISBN 0-7432-2489-2
• Confessions of a Street Addict ISBN 0-7432-2487-6
• You Got Screwed! Why Wall Street Tanked and How You Can Prosper ISBN 0-7432-4690-X

Notes[link]

References[link]

• Kurtz, Howard (2000). The Fortune Tellers: Inside Wall Street's Game of Money, Media, and Manipulation. New York, NY: Simon & Schuster. ISBN 0-684-86879-2. 

External links[link]

Wikiquote has a collection of quotations related to: James Cramer

Biographies[link]

• Jim Cramer biography on CNBC.com
• Jim Cramer biography on TheStreet.com
• Action Alerts PLUS on TheStreet.com

Notable Cramer sources[link]

• Mad Money w/ Jim Cramer Madcap Recap
• Mad Money TV show recapped Nightly Verbatim Recaps
• TheStreet.com, Cramer's investment website.
• Stockpickr Stock market social networking site.
• Articles written by Jim Cramer on MainStreet.com
• In the Money, continued, Balance Sheet, article about Cramer and other law alumni, from the online Harvard Law Bulletin
• Jim Cramer at the Internet Movie Database
• Betting on the Market – PBS Frontline interview with Jim Cramer
• Jim Cramer's Picks at Seeking Alpha
• To The Moon
• Maxim: Ask Jim Cramer, Maxim's interview with Cramer, and Top 2 Chinese Stocks Right Now
• Time's 100 Most Influential People of 2009 – Jim Cramer
• Jim Cramer on the Iraqi Dinar – on DinarProfits.com

Paul Wilmott (born 8 November 1959)^[1] is a researcher, consultant and lecturer in quantitative finance.^[2] He is best known as the author of various academic and practitioner texts on risk and derivatives,^[2] and for Wilmott magazine and Wilmott.com [1], a quantitative finance portal.

After an undergraduate degree in mathematics from St Catherine's College, Oxford, Wilmott stayed on to get a DPhil in fluid mechanics, and went on to work on mathematical modelling for various industries before going into quantitative finance. He is currently the co-owner and Course Director for the Certificate in Quantitative Finance (CQF), a half year distance learning course on mathematical finance at 7City Learning, a London-based company providing training for the financial services industry.^[3] He is a founding partner of Caissa Capital, a volatility arbitrage hedge fund.^[4] He is on the editorial board of the academic journal International Journal of Theoretical and Applied Finance.^[5] He founded the Diploma in Mathematical Finance at Oxford University;^[6] and the journal Applied Mathematical Finance.^[7] He is a director of Wilmott Electronic Media, which manages Wilmott.com, a website for the quantitative analyst community, and is a director of Paul & Dominic Quant Recruitment.^[8]

He has written research articles on finance and mathematics, and, amongst others, has authored the following books:

• Frequently Asked Questions in Quantitative Finance (Wiley 2009)
• Paul Wilmott On Quantitative Finance (Wiley 2006)
• Paul Wilmott Introduces Quantitative Finance (Wiley 2007)
• Frequently Asked Questions in Quantitative Finance (Wiley 2007)
• With J.N.Dewynne and S.D.Howison, Mathematics of Financial Derivatives: a Student Introduction. (Cambridge University Press 1995).
• With Dominic Connor, Paul & Dominic's Guide to Quant Careers.

Together with Emanuel Derman, Paul Wilmott is one of the authors of the Financial Modelers' Manifesto.^[9]

He studied mathematics at St Catherine’s College, Oxford University, where he received his D.Phil in Applied mathematics in 1985.^[10]

See also[link]

• Financial Engineering
• Mathematical finance

References[link]

External links[link]

• Profile on wilmott.com
• Certificate in Quantitative Finance

This article's use of external links may not follow Wikipedia's policies or guidelines. Please improve this article by removing excessive or inappropriate external links, and converting useful links where appropriate into footnote references. (August 2010)

• opinion piece: New York Times
• Interview: Condé Nast Portfolio
• In Business Week
• Bonus Babies in New York Times
• Revenge of the Nerd
• Paul Wilmott says nothing has changed with the banks, CNBC
• The maths of the credit crunch