Equities & Derivatives: Investment Banking Guide

Welcome to the world of Wall Street! 🏦 This guide will take you from zero to understanding how major investment banks like Goldman Sachs, Morgan Stanley, JP Morgan, and others trade equities and derivatives. Grab a coffee ☕ — this is your 60-90 minute journey into the heart of capital markets.

What You'll Learn: How stocks work, what derivatives are, how banks make money trading them, and the key concepts you need to understand this multi-trillion dollar industry.

📚 Table of Contents

Section	Time	What You'll Learn
Part 1: Understanding Equities	15 min	Stocks, markets, how banks participate
Part 2: Introduction to Derivatives	20 min	Options, futures, swaps explained simply
Part 3: Options Deep Dive	20 min	Calls, puts, strategies with examples
Part 4: Investment Bank Structure	15 min	How trading desks work
Part 5: Real-World Examples	10 min	Case studies from famous banks

Part 1: Understanding Equities

What is Equity? 🏠

The Analogy: Owning a Pizza Shop

Imagine you and 3 friends open a pizza shop worth $100,000. Each of you owns 25% — that's equity. You're not lending money to the shop; you own part of it.

Pizza Shop Value: $100,000
┌─────────────────────────────────────────────────┐
│  You: 25%  │  Friend A: 25%  │  Friend B: 25%  │  Friend C: 25%  │
│  ($25,000) │    ($25,000)    │    ($25,000)    │    ($25,000)    │
└─────────────────────────────────────────────────┘

Now imagine the shop becomes publicly traded — anyone can buy a piece:

Pizza Shop Inc. - 100,000 shares at $1 each
┌────────────────────────────────────────────────────────────┐
│ Anyone can buy shares on the stock exchange!               │
│ Buy 1,000 shares = Own 1% of the company                   │
│ Shop doubles in value? Your shares are now worth $2 each!  │
└────────────────────────────────────────────────────────────┘

That's what a stock is — a tiny piece of ownership in a company.

Key Equity Concepts

📊 Market Capitalization (Market Cap)

Definition: The total value of all a company's shares

Market Cap = Share Price × Number of Shares Outstanding

Example: Apple Inc.
- Share Price: $180
- Shares Outstanding: 15.5 billion
- Market Cap: $180 × 15.5B = $2.79 Trillion 🍎

Category	Market Cap	Examples
Mega Cap	> $200 billion	Apple, Microsoft, Google, Amazon
Large Cap	$10-200 billion	Netflix, Adobe, Salesforce
Mid Cap	$2-10 billion	Etsy, Zillow
Small Cap	$300M - $2B	Regional banks, emerging companies
Micro Cap	< $300 million	Startups, penny stocks

📈 Stock Indices

Analogy: A stock index is like a "playlist" of stocks that represents the market

Index	What It Tracks	Analogy
S&P 500	500 largest US companies	The "Billboard Hot 500" of stocks
Dow Jones (DJIA)	30 blue-chip companies	The "Hall of Fame" 30
NASDAQ	Tech-heavy US stocks	The "Tech Playlist"
Russell 2000	2000 small-cap stocks	The "Indie Artists"
FTSE 100	100 largest UK companies	The "British Top 100"
Nikkei 225	225 largest Japanese companies	Japan's "Elite 225"

🔗 Live Index Data: Yahoo Finance - Markets

How Investment Banks Participate in Equities

Investment banks don't just buy and sell stocks for themselves — they're the infrastructure of the market.

                    THE EQUITY ECOSYSTEM
┌──────────────────────────────────────────────────────────┐
│                                                          │
│   INVESTMENT BANK                                        │
│   ┌────────────────────────────────────────────────┐     │
│   │                                                │     │
│   │  📋 UNDERWRITING     💹 SALES & TRADING        │     │
│   │  Help companies      Buy/sell stocks for      │     │
│   │  go public (IPO)     institutional clients    │     │
│   │                                                │     │
│   │  🔬 RESEARCH         🏪 MARKET MAKING          │     │
│   │  Analyze stocks,     Provide liquidity,       │     │
│   │  publish reports     always ready to trade    │     │
│   │                                                │     │
│   └────────────────────────────────────────────────┘     │
│                          │                               │
│                          ▼                               │
│   ┌──────────────────────────────────────────────────┐   │
│   │  CLIENTS: Hedge Funds, Pension Funds, Mutual     │   │
│   │  Funds, Sovereign Wealth Funds, Corporations     │   │
│   └──────────────────────────────────────────────────┘   │
│                                                          │
└──────────────────────────────────────────────────────────┘

Key Roles Explained

Role	What They Do	Analogy
Underwriting	Help companies sell new shares to the public (IPO)	Real estate agent selling a house
Sales	Talk to clients, understand their needs, execute trades	Personal shopper
Trading	Execute large orders, manage risk	The chef in the kitchen
Research	Analyze companies, publish "Buy/Sell/Hold" ratings	Restaurant critics
Market Making	Always ready to buy/sell, provide liquidity	The house in a casino

IPO: How a Company Goes Public

The Analogy: Selling Your Art at an Auction 🎨

You're an artist with valuable paintings. An IPO is like hiring Sotheby's to auction your art for the first time.

COMPANY'S IPO JOURNEY
═══════════════════════════════════════════════════════════

Step 1: HIRE INVESTMENT BANKS (Underwriters)
         Company: "I want to go public!"
         Banks: Goldman Sachs, Morgan Stanley, JP Morgan
         
Step 2: DUE DILIGENCE & VALUATION
         Banks analyze: finances, market, growth potential
         Determine: "Your company is worth $10 billion"
         
Step 3: FILE WITH SEC (S-1 Registration)
         Public document with all company details
         🔗 SEC EDGAR Database: https://www.sec.gov/edgar
         
Step 4: ROADSHOW
         Management presents to institutional investors
         "Here's why you should buy our stock!"
         
Step 5: PRICING
         Based on investor demand, set IPO price
         Example: $50 per share, 100M shares = $5B raised
         
Step 6: LISTING DAY 🔔
         Stock starts trading on NYSE/NASDAQ
         The opening bell rings!

═══════════════════════════════════════════════════════════

Famous IPOs

Company	Year	IPO Price	First Day Close	Bank Lead
Facebook	2012	$38	$38.23	Morgan Stanley
Alibaba	2014	$68	$93.89	Credit Suisse
Uber	2019	$45	$41.57	Morgan Stanley
Airbnb	2020	$68	$144.71	Morgan Stanley
Rivian	2021	$78	$100.73	Morgan Stanley

🔗 Track Upcoming IPOs: Nasdaq IPO Calendar

Part 2: Introduction to Derivatives

What is a Derivative? 🎭

The Analogy: A Contract About Something Else

A derivative is a contract whose value is DERIVED from something else (the "underlying asset")

Think of it like this:

┌─────────────────────────────────────────────────────────┐
│                                                         │
│   UNDERLYING ASSET          DERIVATIVE                  │
│   (The actual thing)        (A contract about it)       │
│                                                         │
│   🏠 House                → Insurance policy            │
│   🌾 Wheat                → Futures contract            │
│   📈 Stock                → Option to buy/sell          │
│   💱 Currency             → Forward contract            │
│   📊 Interest Rate        → Swap agreement              │
│                                                         │
└─────────────────────────────────────────────────────────┘

Real-world analogy: A movie ticket is like a derivative:

The underlying = the movie experience
The derivative = the ticket (gives you the RIGHT to see the movie)
The ticket's value DEPENDS ON the movie's popularity

Types of Derivatives

                    DERIVATIVES FAMILY TREE
                           │
           ┌───────────────┼───────────────┐
           │               │               │
      ┌────▼────┐    ┌─────▼─────┐   ┌─────▼─────┐
      │ OPTIONS │    │  FUTURES  │   │   SWAPS   │
      │         │    │ & FORWARDS│   │           │
      └────┬────┘    └─────┬─────┘   └─────┬─────┘
           │               │               │
     Right, not      Obligation to    Exchange cash
     obligation      buy/sell         flows over time

Quick Overview

Type	What It Is	Analogy	Traded Where
Option	Right (not obligation) to buy/sell	Restaurant reservation	Exchange (CBOE)
Future	Obligation to buy/sell at future date	Pre-ordering a concert ticket	Exchange (CME)
Forward	Same as future, but customized	Custom order from a tailor	OTC (Over-the-Counter)
Swap	Exchange cash flows	Trading chores with a roommate	OTC

Why Do Derivatives Exist?

Three Main Purposes

┌─────────────────────────────────────────────────────────────────┐
│                                                                 │
│  1️⃣  HEDGING (Insurance)                                        │
│      "I want to PROTECT myself from price changes"              │
│                                                                 │
│      Example: Airline buys oil futures to lock in fuel prices   │
│                                                                 │
│  2️⃣  SPECULATION (Betting)                                       │
│      "I want to PROFIT from price changes"                      │
│                                                                 │
│      Example: Trader buys call options betting stock goes up    │
│                                                                 │
│  3️⃣  ARBITRAGE (Risk-free profit)                                │
│      "I want to exploit PRICE DIFFERENCES"                      │
│                                                                 │
│      Example: Buy low in one market, sell high in another       │
│                                                                 │
└─────────────────────────────────────────────────────────────────┘

Futures Contracts Explained

The Analogy: Pre-ordering a Limited Edition Sneaker 👟

You want the new Jordan sneakers releasing in 3 months at $200. You're worried the price will go up. So you sign a contract TODAY to buy them at $200 in 3 months, no matter what happens.

FUTURES CONTRACT
════════════════════════════════════════════════════════
TODAY (February):
- You AGREE to buy sneakers in May
- Price locked at $200
- Both parties MUST honor the contract

SCENARIO A: Sneakers retail for $300 in May
- You still pay $200 ✅
- You saved $100! 🎉

SCENARIO B: Sneakers retail for $150 in May  
- You still pay $200 ❌
- You lost $50 😢

════════════════════════════════════════════════════════

Real Futures Example: Oil

Crude Oil Futures Contract (CME)
━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━
Contract Size: 1,000 barrels
Current Price: $75 per barrel
Expiry: March 2026
Contract Value: $75 × 1,000 = $75,000

If oil goes to $80 at expiry:
- Long position profit: ($80-$75) × 1,000 = $5,000
- Short position loss: -$5,000

If oil goes to $70 at expiry:
- Long position loss: -$5,000
- Short position profit: $5,000

🔗 Live Futures Prices: CME Group

Swaps Explained

The Analogy: Trading Chores with Your Roommate 🏠

You hate washing dishes but don't mind vacuuming. Your roommate is the opposite. You SWAP:

BEFORE SWAP:
You: Dishes (hate it) + Vacuuming (okay)
Roommate: Dishes (loves it) + Vacuuming (hates it)

AFTER SWAP:
You: Vacuuming only ✅
Roommate: Dishes only ✅

Both are happier! This is a SWAP.

Interest Rate Swap (Most Common)

The Big Idea: Company A has a floating rate loan. Company B has a fixed rate loan. They SWAP payments.

INTEREST RATE SWAP EXAMPLE
══════════════════════════════════════════════════════════

Company A (wants fixed rate):
- Has: Floating rate loan (changes with market)
- Worried: Rates might go UP

Company B (wants floating rate):
- Has: Fixed rate loan (stays same)
- Thinks: Rates might go DOWN

THE SWAP:
┌────────────┐                    ┌────────────┐
│ Company A  │ ───Fixed 5%────►   │ Company B  │
│            │ ◄──Floating LIBOR──│            │
└────────────┘                    └────────────┘

Result:
- A effectively has fixed rate (what they wanted)
- B effectively has floating rate (what they wanted)
- Both pay what they prefer!

══════════════════════════════════════════════════════════

Types of Swaps

Swap Type	What's Exchanged	Example Use Case
Interest Rate Swap	Fixed vs. Floating payments	Managing loan risk
Currency Swap	Different currency payments	International business
Credit Default Swap (CDS)	Protection against default	Insurance on bonds
Total Return Swap	Total return of an asset	Synthetic ownership
Equity Swap	Equity returns for fixed/floating	Portfolio management

📊 Market Size: The global swaps market is over $400 trillion in notional value!

Part 3: Options Deep Dive

Options: The Right, Not the Obligation

The Analogy: A Non-Refundable Deposit on a House 🏠

You want to buy a house worth $500,000, but need 3 months to arrange financing. You pay the seller a $10,000 option fee to "lock in" the price.

HOUSE OPTION EXAMPLE
═══════════════════════════════════════════════════════════

You pay: $10,000 today (the "premium")
You get: The RIGHT to buy the house at $500,000 in 3 months

SCENARIO A: House value rises to $600,000
- You exercise your option
- Buy at $500,000, instantly worth $600,000
- Profit: $100,000 - $10,000 premium = $90,000 ✅

SCENARIO B: House value falls to $400,000
- You DON'T exercise (why buy at $500K if worth $400K?)
- You lose your $10,000 premium
- Loss: $10,000 (but saved from $100,000 loss!) ✅

SCENARIO C: You change your mind
- You don't HAVE to buy
- You just lose your $10,000 premium

═══════════════════════════════════════════════════════════

Call Options vs. Put Options

┌────────────────────────────────────────────────────────────┐
│                                                            │
│   CALL OPTION 📈                PUT OPTION 📉              │
│   Right to BUY                  Right to SELL              │
│                                                            │
│   You're BULLISH                You're BEARISH             │
│   (think price goes UP)         (think price goes DOWN)    │
│                                                            │
│   "I want to buy low            "I want to sell high       │
│    if price rises"               if price falls"           │
│                                                            │
└────────────────────────────────────────────────────────────┘

Visual Representation

CALL OPTION PAYOFF (Buying a Call)
                    │
                    │              ╱
        Profit      │            ╱
                    │          ╱
────────────────────┼────────●────────────────► Stock Price
                    │        │╲
        Loss        │        │  ╲ Max Loss = Premium Paid
                    │      Strike
                    │      Price
                    
                    
PUT OPTION PAYOFF (Buying a Put)
                    │
        ╲           │
          ╲         │
            ╲       │
              ●─────┼──────────────────────────► Stock Price
              │     │
            Strike  │  Max Loss = Premium Paid
            Price   │

Options Terminology Explained

Term	Definition	Analogy
Premium	Price paid for the option	The reservation fee
Strike Price	Price at which you can buy/sell	The agreed house price
Expiration Date	When the option expires	Reservation deadline
Underlying	The asset the option is based on	The house itself
In-the-Money (ITM)	Option has intrinsic value	House worth more than your price
Out-of-the-Money (OTM)	Option has no intrinsic value	House worth less than your price
At-the-Money (ATM)	Strike = Current price	House worth exactly your price

In/Out/At the Money Examples

Stock trading at: $100

CALL OPTIONS:
━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━
Strike $90  → IN-THE-MONEY (ITM) ✅
              You can buy at $90, sell at $100 = $10 value

Strike $100 → AT-THE-MONEY (ATM) ➖
              Break-even territory

Strike $110 → OUT-OF-THE-MONEY (OTM) ❌
              Why buy at $110 when market is $100?

PUT OPTIONS:
━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━
Strike $110 → IN-THE-MONEY (ITM) ✅
              You can sell at $110, buy at $100 = $10 value

Strike $100 → AT-THE-MONEY (ATM) ➖

Strike $90  → OUT-OF-THE-MONEY (OTM) ❌
              Why sell at $90 when market is $100?

Complete Options Example

Apple (AAPL) Call Option

═══════════════════════════════════════════════════════════════
AAPL CALL OPTION ANALYSIS
═══════════════════════════════════════════════════════════════

Current Stock Price: $180
Option Type: CALL
Strike Price: $185
Expiration: 30 days
Premium: $5.00 per share
Contract Size: 100 shares

TOTAL COST: $5.00 × 100 = $500

═══════════════════════════════════════════════════════════════
SCENARIO ANALYSIS
═══════════════════════════════════════════════════════════════

If AAPL = $200 at expiration:
┌─────────────────────────────────────────────────────────────┐
│ Intrinsic Value: $200 - $185 = $15 per share                │
│ Total Value: $15 × 100 = $1,500                             │
│ Profit: $1,500 - $500 (premium) = $1,000 ✅                 │
│ Return: 200% 🚀                                             │
└─────────────────────────────────────────────────────────────┘

If AAPL = $185 at expiration:
┌─────────────────────────────────────────────────────────────┐
│ Intrinsic Value: $185 - $185 = $0                           │
│ Option expires worthless                                     │
│ Loss: $500 (entire premium) ❌                              │
└─────────────────────────────────────────────────────────────┘

If AAPL = $170 at expiration:
┌─────────────────────────────────────────────────────────────┐
│ Option expires worthless (why buy at $185 if stock is $170?)│
│ Loss: $500 (entire premium) ❌                              │
└─────────────────────────────────────────────────────────────┘

BREAK-EVEN POINT: $185 + $5 = $190
(Stock must exceed $190 for you to profit)

═══════════════════════════════════════════════════════════════

The Greeks: Measuring Option Risk

The Greeks tell you HOW an option's price will change when something else changes

Greek	Symbol	Measures	Analogy
Delta	Δ	Price change per $1 stock move	Speedometer
Gamma	Γ	How fast delta changes	Acceleration
Theta	Θ	Time decay per day	Melting ice
Vega	V	Sensitivity to volatility	Sensitivity to weather
Rho	ρ	Sensitivity to interest rates	Sensitivity to inflation

Delta Explained

DELTA (Δ): How much option moves per $1 stock move
═══════════════════════════════════════════════════════════

Call Option with Delta = 0.50

Stock goes UP $1:
- Option price goes UP $0.50

Stock goes DOWN $1:
- Option price goes DOWN $0.50

═══════════════════════════════════════════════════════════

DELTA RANGES:
┌─────────────────────────────────────────────────────────┐
│ CALLS: 0 to +1.0                                        │
│ PUTS: -1.0 to 0                                         │
│                                                         │
│ Deep ITM Call: Delta ≈ 0.90 (moves almost like stock)   │
│ ATM Call: Delta ≈ 0.50 (moves half as much)             │
│ Deep OTM Call: Delta ≈ 0.10 (barely moves)              │
└─────────────────────────────────────────────────────────┘

Theta (Time Decay)

THETA: Options LOSE value every day (time decay)
═══════════════════════════════════════════════════════════

Option Price: $5.00
Theta: -$0.10

Tomorrow (all else equal):
Option Price: $5.00 - $0.10 = $4.90

═══════════════════════════════════════════════════════════

TIME DECAY VISUALIZATION:

Option Value
    │
$10 │●
    │  ●
    │    ●
 $5 │      ●
    │         ●
    │            ●●●
 $0 │──────────────●────────► Time
    30 days    10 days  Expiry

⚠️ Time decay ACCELERATES near expiration!
═══════════════════════════════════════════════════════════

🔗 Options Calculator: Options Profit Calculator

Popular Options Strategies

Basic Strategies

Strategy	When to Use	Max Profit	Max Loss
Long Call	Bullish	Unlimited	Premium paid
Long Put	Bearish	Strike - Premium	Premium paid
Covered Call	Mildly bullish	Premium + (Strike - Stock)	Stock drops to zero
Protective Put	Own stock, worried	Unlimited upside	Premium paid

Intermediate Strategies

BULL CALL SPREAD
═══════════════════════════════════════════════════════════
"Bullish but want to limit cost"

Buy: Call at lower strike ($100)  - Pay $8
Sell: Call at higher strike ($110) - Receive $3
Net Cost: $5

       Profit
         │         ╱────────
         │       ╱
         │     ╱
    ─────┼───●─────●─────────► Stock Price
         │  $100  $110
    -$5  │●●●╱
         │
         
Max Profit: $10 - $5 = $5 (at $110 or above)
Max Loss: $5 (below $100)
═══════════════════════════════════════════════════════════


IRON CONDOR
═══════════════════════════════════════════════════════════
"I think stock will stay in a range"

Sell Put at $90 + Buy Put at $85 (Bull Put Spread)
Sell Call at $110 + Buy Call at $115 (Bear Call Spread)

       Profit
         │    ●────────────●
         │   ╱              ╲
    ─────┼──●────────────────●──► Stock Price
         │  $90  PROFIT ZONE  $110
         │╱                    ╲
         ●                      ●

Profit if stock stays between $90-$110
Loss if stock moves outside this range
═══════════════════════════════════════════════════════════

Part 4: Investment Bank Structure

How a Major Bank's Trading Floor Works

═══════════════════════════════════════════════════════════════════
                    INVESTMENT BANK TRADING DIVISION
═══════════════════════════════════════════════════════════════════

                         ┌─────────────────────────┐
                         │      CEO / President    │
                         └───────────┬─────────────┘
                                     │
                         ┌───────────▼─────────────┐
                         │   Head of Trading       │
                         └───────────┬─────────────┘
                                     │
         ┌───────────────────────────┼───────────────────────────┐
         │                           │                           │
         ▼                           ▼                           ▼
┌─────────────────┐       ┌─────────────────┐       ┌─────────────────┐
│    EQUITIES     │       │     FICC        │       │    PRIME        │
│                 │       │ (Fixed Income,  │       │   BROKERAGE     │
│ • Cash Trading  │       │  Currencies &   │       │                 │
│ • Derivatives   │       │  Commodities)   │       │ • Hedge Fund    │
│ • ETF/Index     │       │                 │       │   Services      │
│ • Program       │       │ • Rates         │       │ • Securities    │
│   Trading       │       │ • Credit        │       │   Lending       │
│                 │       │ • FX            │       │ • Financing     │
└─────────────────┘       │ • Commodities   │       └─────────────────┘
                          └─────────────────┘
                          
═══════════════════════════════════════════════════════════════════

Equity Derivatives Desk Structure

═══════════════════════════════════════════════════════════════════
                    EQUITY DERIVATIVES DESK
═══════════════════════════════════════════════════════════════════

                    ┌───────────────────────────┐
                    │  Head of Equity Derivs    │
                    └─────────────┬─────────────┘
                                  │
    ┌─────────────┬───────────────┼───────────────┬─────────────┐
    │             │               │               │             │
    ▼             ▼               ▼               ▼             ▼
┌─────────┐  ┌─────────┐   ┌───────────┐  ┌──────────┐  ┌─────────┐
│ FLOW    │  │ EXOTIC  │   │ STRUCTURED│  │ QUANT    │  │ RISK    │
│ OPTIONS │  │ OPTIONS │   │ PRODUCTS  │  │ RESEARCH │  │ MGMT    │
│         │  │         │   │           │  │          │  │         │
│ Vanilla │  │ Barriers│   │ Notes     │  │ Models   │  │ Greeks  │
│ calls & │  │ Asians  │   │ Autocalls │  │ Pricing  │  │ Limits  │
│ puts    │  │ Lookback│   │ CLNs      │  │ Analytics│  │ P&L     │
└─────────┘  └─────────┘   └───────────┘  └──────────┘  └─────────┘

═══════════════════════════════════════════════════════════════════

ROLES EXPLAINED:

📊 FLOW OPTIONS (Vanilla Trading)
   - Trade standard calls/puts
   - High volume, lower margins
   - Fast-paced, market-making

🎰 EXOTIC OPTIONS
   - Complex, non-standard options
   - Barriers, Asians, Lookbacks
   - Higher margins, more math

📋 STRUCTURED PRODUCTS
   - Package derivatives for clients
   - Autocallables, reverse convertibles
   - Customized risk/return profiles

🔢 QUANT RESEARCH
   - Build pricing models
   - Develop new products
   - PhDs and Math wizards

⚠️ RISK MANAGEMENT
   - Monitor Greek exposures
   - Set and enforce limits
   - Stress testing

═══════════════════════════════════════════════════════════════════

Day in the Life: Equity Derivatives Trader

═══════════════════════════════════════════════════════════════════
        A DAY ON THE EQUITY DERIVATIVES DESK (NYC)
═══════════════════════════════════════════════════════════════════

6:00 AM  │ 🌅 Wake up, check overnight markets
         │    - Asia closed, Europe opening
         │    - Review positions affected by overnight news
         │
7:00 AM  │ ☕ Arrive at desk, morning meeting
         │    - Risk review from overnight
         │    - Key events: earnings, economic data
         │
7:30 AM  │ 📊 Pre-market preparation
         │    - Update pricing models
         │    - Review client orders
         │
9:30 AM  │ 🔔 MARKET OPEN - Game time!
         │    - Execute opening trades
         │    - Manage flow from clients
         │
10:00 AM │ 📞 Client calls begin
         │    - "I want to hedge my tech exposure"
         │    - "Price me a 3-month put spread"
         │
12:00 PM │ 🍕 Quick lunch at desk
         │    - Markets don't stop for lunch
         │
2:00 PM  │ 📈 Afternoon trading
         │    - Manage gamma heading into close
         │    - Adjust hedges
         │
4:00 PM  │ 🔔 MARKET CLOSE
         │    - End-of-day P&L
         │    - Position reconciliation
         │
5:00 PM  │ 📋 Risk sign-off
         │    - Review overnight risk
         │    - Handoff to Asia desk
         │
6:00 PM  │ 🏠 Head home (maybe)
         │    - Check markets from phone
         │
═══════════════════════════════════════════════════════════════════

Part 5: Real-World Examples

Case Study 1: Goldman Sachs Market Making

How Market Making Works

═══════════════════════════════════════════════════════════════════
MARKET MAKING: Being the "House" for Options
═══════════════════════════════════════════════════════════════════

Goldman Sachs makes markets in Apple options:

               BID                    ASK
              $4.95 ◄────SPREAD────► $5.05
              
              "We'll BUY             "We'll SELL
               at $4.95"              at $5.05"

Client A wants to BUY → Pays $5.05 to Goldman
Client B wants to SELL → Gets $4.95 from Goldman

Goldman's profit: $5.05 - $4.95 = $0.10 per share
                  × 100 shares per contract
                  × thousands of contracts per day
                  = Millions in revenue

═══════════════════════════════════════════════════════════════════

THE CATCH: Goldman now has RISK

After Client A buys:
- Goldman is SHORT the call option
- If Apple stock rockets up, Goldman loses money!

HEDGING:
- Goldman buys Apple stock (delta hedge)
- Continuously adjusts as price moves
- Goal: Capture the spread, minimize directional risk

═══════════════════════════════════════════════════════════════════

Case Study 2: JP Morgan Structured Product

Autocallable Note Example

═══════════════════════════════════════════════════════════════════
JP MORGAN AUTOCALLABLE NOTE ON S&P 500
═══════════════════════════════════════════════════════════════════

PRODUCT SUMMARY:
Investment: $100,000
Term: 2 years
Reference: S&P 500 (starting level: 5,000)
Coupon: 10% per year (if conditions met)
Autocall Barrier: 100% (at or above starting level)
Protection Barrier: 70% (lose principal if breached)

═══════════════════════════════════════════════════════════════════

HOW IT WORKS:

Month 6, 12, 18 (Observation Dates):
┌─────────────────────────────────────────────────────────────────┐
│ IF S&P 500 ≥ 5,000 (100%):                                      │
│   → Note AUTOCALLS (terminates early)                           │
│   → You get: Principal + 10% × (months held / 12)               │
│                                                                 │
│ IF S&P 500 < 5,000:                                             │
│   → Note continues to next observation                          │
└─────────────────────────────────────────────────────────────────┘

Month 24 (Final Maturity):
┌─────────────────────────────────────────────────────────────────┐
│ IF S&P 500 ≥ 3,500 (70% barrier):                               │
│   → You get: Principal back ($100,000)                          │
│   → Plus: Accrued coupons if any triggered                      │
│                                                                 │
│ IF S&P 500 < 3,500 (barrier breached):                          │
│   → You get: Principal × (Final Level / 5,000)                  │
│   → Example: S&P at 3,000 → $100,000 × 0.60 = $60,000 😱        │
└─────────────────────────────────────────────────────────────────┘

═══════════════════════════════════════════════════════════════════

WHY CLIENTS BUY THIS:
✅ 10% coupon in a low-yield environment
✅ 30% downside buffer
✅ Monthly income potential

WHY IT'S RISKY:
❌ Can lose significant principal if market crashes
❌ Capped upside (miss out if market soars)
❌ Complexity hides true risk

═══════════════════════════════════════════════════════════════════

Case Study 3: The 2008 Credit Derivatives Crisis

What Happened with Credit Default Swaps

═══════════════════════════════════════════════════════════════════
2008: WHEN DERIVATIVES WENT WRONG
═══════════════════════════════════════════════════════════════════

CREDIT DEFAULT SWAP (CDS): Insurance against bond defaults

Normal Use:
┌─────────────────────────────────────────────────────────────────┐
│ Bank owns $100M in corporate bonds                              │
│ Worried company might default                                   │
│ Buys CDS protection → Pays small premium                        │
│ If default → CDS seller pays Bank the $100M                     │
│                                                                 │
│ Like fire insurance for your bond portfolio                     │
└─────────────────────────────────────────────────────────────────┘

What Went Wrong:
┌─────────────────────────────────────────────────────────────────┐
│ 1. Banks bought CDS on mortgage bonds they didn't own           │
│    (Speculation, not hedging)                                   │
│                                                                 │
│ 2. AIG sold $500+ BILLION in CDS protection                     │
│    (Without enough capital to back it up)                       │
│                                                                 │
│ 3. When mortgages defaulted en masse:                           │
│    - Everyone wanted AIG to pay up                              │
│    - AIG couldn't pay → Needed $180B government bailout         │
│    - Lehman Brothers collapsed                                  │
│    - Global financial crisis                                    │
└─────────────────────────────────────────────────────────────────┘

LESSON:
Derivatives are tools. Like a chainsaw:
- Used properly → Incredibly useful
- Used recklessly → Catastrophic

═══════════════════════════════════════════════════════════════════

🎬 Watch: "The Big Short" (2015) - Excellent film explaining the 2008 crisis

Case Study 4: GameStop 2021 - Options Gamma Squeeze

═══════════════════════════════════════════════════════════════════
GAMESTOP JANUARY 2021: Options Gone Wild
═══════════════════════════════════════════════════════════════════

THE SETUP:
- GameStop (GME) trading around $20
- Heavy short interest (hedge funds betting it would fall)
- Reddit's r/WallStreetBets starts buying calls

THE MECHANICS:
┌─────────────────────────────────────────────────────────────────┐
│ Step 1: Retail traders buy massive amounts of call options      │
│                                                                 │
│ Step 2: Market makers who sold calls need to hedge              │
│         They buy GME stock (delta hedging)                      │
│                                                                 │
│ Step 3: Buying pressure pushes stock UP                         │
│                                                                 │
│ Step 4: As stock rises, call deltas increase (gamma)            │
│         Market makers must buy MORE stock                       │
│                                                                 │
│ Step 5: More buying → Higher price → More buying                │
│         GAMMA SQUEEZE! 🚀                                       │
│                                                                 │
│ Step 6: Short sellers forced to buy to cover losses             │
│         SHORT SQUEEZE on top of GAMMA SQUEEZE!                  │
└─────────────────────────────────────────────────────────────────┘

THE RESULT:
GME: $20 → $483 (in about 2 weeks)
Some retail traders: Made millions
Some hedge funds: Lost billions (Melvin Capital)
Trading platforms: Restricted buying (controversy)

═══════════════════════════════════════════════════════════════════

Major Banks' Equity Derivatives Revenue

Bank	2024 Equities Revenue	Key Strengths
Goldman Sachs	~$12B	Market making, structured products
Morgan Stanley	~$10B	Prime brokerage, wealth management
JP Morgan	~$9B	Derivatives, cross-selling
Bank of America	~$6B	ETF flow, corporate hedging
Citigroup	~$4B	Global presence, FX cross
Barclays	~$3B	European structured products
UBS	~$3B	Wealth management structured products
Deutsche Bank	~$2B	Structured products expertise

🔗 Bank Investor Relations:

Goldman Sachs

Morgan Stanley

JP Morgan

Quick Reference Cheatsheets

Equities Cheatsheet

Term	Definition	Quick Memory
Equity	Ownership in a company	Your slice of the pizza
Share	Unit of equity	One piece of pizza
IPO	First public stock sale	Grand opening party
Market Cap	Total value of all shares	Full pizza price
Index	Basket of stocks	Playlist of stocks
Long	Own/bought stock	Betting it goes up
Short	Borrowed and sold stock	Betting it goes down
Bull Market	Rising market	🐂 Horns thrust UP
Bear Market	Falling market	🐻 Claws swipe DOWN
Dividend	Company profit paid to shareholders	Your share of profits

Derivatives Cheatsheet

Term	Definition	Quick Memory
Derivative	Contract based on another asset	Concert ticket (not the concert)
Option	Right, not obligation	Restaurant reservation
Future	Obligation to trade later	Pre-order commitment
Swap	Exchange of cash flows	Trading chores
Premium	Option price	Reservation fee
Strike	Agreed trade price	The locked-in price
Call	Right to BUY	"Call it mine!"
Put	Right to SELL	"Put it away!"
ITM	Has intrinsic value	Good deal right now
OTM	No intrinsic value	Bad deal right now
Delta	Price sensitivity	Speedometer
Theta	Time decay	Melting ice cream
Hedge	Reduce risk	Insurance

📚 Useful References & Links

Learning Resources

Resource	Description
Investopedia	Financial encyclopedia - start here for any term
Khan Academy Finance	Free video courses on finance basics
Options Industry Council	Free options education
CME Group Education	Futures and derivatives learning
Corporate Finance Institute	Professional finance courses

Market Data & News

Resource	Description
Yahoo Finance	Free stock quotes, news, options chains
Bloomberg	Professional financial news
CNBC	Market news and analysis
Financial Times	Global business news
Seeking Alpha	Investment research and analysis

Tools & Calculators

Tool	Use For
Options Profit Calculator	Visualize options strategies
TradingView	Charts and technical analysis
Finviz	Stock screener and market visualization
CBOE Options Calculator	Professional options pricing

Books Worth Reading

Book	Author	Why Read It
"Options, Futures, and Other Derivatives"	John C. Hull	The textbook for derivatives (academic)
"The Big Short"	Michael Lewis	2008 crisis explained as a story
"When Genius Failed"	Roger Lowenstein	LTCM hedge fund collapse
"Liar's Poker"	Michael Lewis	Inside 1980s Wall Street
"Flash Boys"	Michael Lewis	High-frequency trading explained
"A Random Walk Down Wall Street"	Burton Malkiel	Investment philosophy classic

Video & Documentaries

Watch	Description
The Big Short (2015)	2008 financial crisis dramatized
Margin Call (2011)	24 hours during 2008 crisis
Too Big to Fail (2011)	Government's response to 2008
Inside Job (2010)	Oscar-winning documentary on 2008
Billions (TV Series)	Hedge fund drama

Regulatory & Data Sources

Source	What You'll Find
SEC EDGAR	Company filings (10-K, 10-Q, S-1)
FINRA	Broker regulation
OCC	Options Clearing Corporation data
ISDA	Derivatives market documentation
Federal Reserve	Interest rates, economic data

🎯 Key Takeaways

═══════════════════════════════════════════════════════════════════
               WHAT TO REMEMBER FROM THIS GUIDE
═══════════════════════════════════════════════════════════════════

1. EQUITIES = Ownership
   - Stocks represent ownership in companies
   - Investment banks help companies go public (IPO)
   - Banks make markets, provide liquidity

2. DERIVATIVES = Contracts based on something else
   - Options: Right, not obligation
   - Futures: Obligation
   - Swaps: Exchange of cash flows

3. OPTIONS Key Concepts:
   - Calls for bullish, Puts for bearish
   - Premium is what you pay
   - Strike is your locked-in price
   - Greeks measure different risks

4. Banks play multiple roles:
   - Underwriting (help companies raise money)
   - Sales & Trading (execute for clients)
   - Market Making (provide liquidity)
   - Risk Management (protect the firm)

5. Derivatives can be used for:
   - Hedging (reducing risk)
   - Speculation (taking risk for profit)
   - Arbitrage (exploiting price differences)

═══════════════════════════════════════════════════════════════════

Congratulations on completing this guide! 🎉 You now understand the fundamentals of how Wall Street's biggest banks trade equities and derivatives. Remember: the best way to learn is by doing — open a paper trading account and try some of these concepts yourself!

Last updated: February 2026

📚 Table of Contents​

Part 1: Understanding Equities

What is Equity? 🏠​

The Analogy: Owning a Pizza Shop​

Key Equity Concepts​

📊 Market Capitalization (Market Cap)​

📈 Stock Indices​

How Investment Banks Participate in Equities​

Key Roles Explained​

IPO: How a Company Goes Public​

The Analogy: Selling Your Art at an Auction 🎨​

Famous IPOs​

Part 2: Introduction to Derivatives

What is a Derivative? 🎭​

The Analogy: A Contract About Something Else​

Types of Derivatives​

Quick Overview​

Why Do Derivatives Exist?​

Three Main Purposes​

Futures Contracts Explained​

The Analogy: Pre-ordering a Limited Edition Sneaker 👟​

Real Futures Example: Oil​

Swaps Explained​

The Analogy: Trading Chores with Your Roommate 🏠​

Interest Rate Swap (Most Common)​

Types of Swaps​

Part 3: Options Deep Dive

Options: The Right, Not the Obligation​

The Analogy: A Non-Refundable Deposit on a House 🏠​

Call Options vs. Put Options​

Visual Representation​

Options Terminology Explained​

In/Out/At the Money Examples​

Complete Options Example​

Apple (AAPL) Call Option​

The Greeks: Measuring Option Risk​

Delta Explained​

Theta (Time Decay)​

Popular Options Strategies​

Basic Strategies​

Intermediate Strategies​