Bought Strangles Identifying Trades – The Greeks

Posted on October 12th, 2010 admin No Comments

Delta

The net delta of a bought strangle is approximately 0 when the bought call and put strike price are even distance from the share price. If the share price is closer to the bought call the net delta will be slightly positive and if the share price is closer to the bough put the net delta will be slightly negative. As the share price increases the net delta will also increase due to the bought call delta increasing and the bought put delta decreasing. So this indicates that the net delta starts of relatively neutral and becomes positive or negative depending if the share price increase or decreases.

Vega

The bought strangle is affected by the volatility of the share price. The bought strangle is implemented when volatility is low and expected to increase. This is a major influence on the strategy pricing as there are two bought options. Information on identifying volatility trends is explained in the technical analysis section.

Theta

Time decay has a very negative effect on the bought strangle. As the strategy is made up of two bought options the impact of time decay is emphasised. One way to reduce the effect of time decay is to buy a long-dated strangle as time decay effects the option prices most in the last three months. The trouble with this is that you have to pay a lot to enter these trades and therefore they have larger risk (maximum loss).

To receive ASX Option Recommendation or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Bull Put Spread: Identifying Trades – The Greeks

Posted on March 16th, 2010 admin No Comments

Delta

When identifying trades it is essential to look at the delta of the option legs. In particular it is important to calculate the net delta of the bull put spread. The net delta is calculated by the delta of the sold put option minus the delta of the bought put option. The net delta will always be negative. The net delta indicates if the share price increases quickly what the value of the bull put spread will be worth. For example, if a bull call spread had a net delta of -0.20, and the share price decreased by $1.00, the bull put spread would have decreased by 20 cents. Therefore to close out the position you buy back the position for less than the premium received to enter the trade.

Vega

The volatility affect on a bull put spread is positive. When looking to enter a bull put spread you look to sell an out-of-the-money put option. The idea is to sell a put option which has a relatively high volatility and therefore trading above its theoretical value. The bought put even further out-of-the-money and you want to buy this option with low volatility. When entering the trade you want to volatility to be high and decrease throughout the trade.

Theta

Credit spreads are set up to take advantage of time decay. The effect of time decay on this strategy varied with the underlying share price level in relation to the strike prices of the long and short options. If the stock price is midway between the strike prices, the effect can be minimal. If the stock price is closer to the higher strike price of the sold put, profits generally increase at a faster rate as time passes. Alternatively, if the underlying stock price is closer to the lower strike price of the bought put, losses generally increase at a faster rate as time passes.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Bear Call Spread: Identifying Trades – The Greeks

Posted on March 9th, 2010 admin No Comments

Delta

When identifying trades it is essential to look at the delta of the option legs. In particular it is important to calculate the net delta of the bear call spread. The net delta is calculated by the delta of the bought call option minus the delta of the sold call option. The net delta will always be positive. The net delta indicates if the share price decreases quickly what the value of the bear call spread will be worth. For example, if a bear call spread had a net delta of 0.20, and the share price decreased by $1.00, the bear call spread would have decreased by 20 cents.

Vega

The volatility affect on a bear call spread is varied. When looking to enter a bear call spread you look to sell an out-of-the-money call option. The idea is to sell a call which has a relatively high volatility and therefore trading above its theoretical value. The bear call spread can be traded when volatility is high on the call option which allows the spread to be higher above the current share price so the stock would have to increase further before affecting the trade.

Theta

Credit spreads are trades that take advantage of the time decay nature of options. The effect or time decay is a positive for this trade. When the share price is below the sold call if the share price and volatility remain constant this value of the position will reduce and therefore increase your profit. If the stock price is closer to the lower strike price of the sold call, profits generally increase at a faster rate as time passes. Alternatively, if the underlying stock price is closer to the higher strike price of the bought call, profits generally decrease at a faster rate as time passes.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Bear Put Spread: Identifying Trades – The Greeks

Posted on March 3rd, 2010 admin No Comments

Delta

When identifying trades it is essential to look at the delta of the option legs. In particular it is important to calculate the net delta of the bear put spread. The net delta is calculated by the delta of the bought put option minus the delta of the sold put option. The net delta of a bear put spread is always negative. The net delta indicates if the share price decreases quickly what the value of the bear put spread will be worth. For example, if a bear put spread had a net delta of -0.30, and the share price decreased by $2.00, the bear put spread would have increased by 60 cents.

Vega

The volatility affect on a bear put spread is varied. When looking to enter a bear put spread you look to buy an at-the-money put option. The idea is to buy a put which has a relatively low volatility and therefore trading at its theoretical value. The sold put is sold out-of-the-money and the aim to sell puts with higher volatility so you receive a larger premium. The strategy can be traded with high volatility as the volatility does not affect this trade as much as buying a put option. This is because the high volatility is priced into both the bought and sold call options.

Theta

The effect of time decay on this strategy varies with the underlying stock’s price level in relation to the strike prices of the bought and sold options. If the stock price is midway between the strike prices, the effect can be minimal. If the share price is closer to the higher strike price of the bought put, losses generally increase at a faster rate as time passes. Alternatively, if the share price is closer to the lower strike price of the sold put, profits generally increase at a faster rate as time passes.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Bull Call Spread: Identifying Trades – The Greeks

Posted on February 26th, 2010 admin No Comments

Delta

When identifying trades it is essential to look at the delta of the option legs. In particular it is important to calculate the net delta of the bull call spread. The net delta is calculated by the delta of the bought option minus the delta of the sold option. The net delta of a bull call spread will always be positive. The net delta indicates if the share price increases quickly what the value of the bull call spread will be worth. For example, if a bull call spread had a net delta of 0.35, and the share price increased by $1.00, the bull call spread would have increased approximately by 35 cents.

Vega

The volatility affect on a bull call spread is varied. When looking to enter a bull call spread you look to buy an at-the-money call option. The idea is to buy a call which has a relatively low volatility and therefore trading at its theoretical value. The sold call which you are selling out-of-the-money you are looking for as much volatility as possible. So you are selecting an option that is trading a lot higher than theoretical value. This means you receive greater premium for that option and it makes the bull call spread cheaper to enter. A bought call is best purchased when volatility is low but when volatility is high and the call is too expensive a bull call spread is an alternative strategy. This is because the higher volatility on the bought option is offset by the high volatility on the sold option.

Theta

The effect of time decay on this strategy varies with the underlying stock’s price level in relation to the strike prices of the long and short options. If the stock price is midway between the strike prices, the effect can be minimal. If the stock price is closer to the lower strike price of the bought call, losses generally increase at a faster rate as time passes. Alternatively, if the underlying stock price is closer to the higher strike price of the sold call, profits generally increase at a faster rate as time passes.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Introduction to Options Trading: Option Vega

Posted on February 18th, 2010 admin No Comments

Options trading revolves around the understanding of volatility. Vega refers to the change in the prevailing level of option volatility. When volatility is low and you expect a move in a share price it is best to buy options to take advantage of this move. When volatility is high and you expect it to decrease selling options best suits this market. The advanced traders sell options in periods of high volatility and buy options in periods of low volatility.

Volatility and time have a strong relationship. The graph below indicates that the more time to expiry the greater the uncertainty. Therefore increased time means increased volatility.

The volatility smile is a long-observed pattern in which at-the-money options tend to have lower implied volatility than other options. The pattern displays different characteristics for different markets and results from the probability of extreme moves. The reasons for the volatility smile are due to behavioural causes. These include crash protection which is the buying of out-of-the-money puts for fear of a market crash. Also, expectation of changes in volatility over time can affect the options prices. Technical analysis also explains increased activity in out-of-the-money options with support/resistance levels at various strikes being traded more actively. The vega of at-the-money options is relatively insensitive to change in volatility compared to out-of-the-money see below.


To receive ASX Option Recommendations or to learn more about trading options please request the complete Introduction to Options Trading eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Option Greeks

Posted on February 16th, 2010 admin No Comments

The “Greeks” in options trading is known as a way to measure the sensitivity of an option price to changes in its parameters. The Greeks can help option traders to better understand the potential risk and reward of an option position. However, it is important to note that the numbers given for each of the Greeks are strictly theoretical, as they are only projections based on mathematical models.

  • Delta: is a measure of the change in the option price resulting from a change in the underlying stock price.
  • Gamma: is a measure the rate of change of delta due to a one-point change in the price of the underlying stock.
  • Theta: is a measure of the rate of decline of an option’s time value resulting from the passage of time known as time decay.
  • Vega: is a measure of the sensitivity of an option’s price to changes in Implied Volatility (IV).
  • Rho: is a measure of the change in an option’s price due to a change in interest rate. If interest rates increase this will mean that the call options value increases and the put options value decreases.


To receive ASX Option Recommendations or to learn more about trading options please request the complete Introduction to Options Trading eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Covered Calls – The Greeks: Finding Option Trades

Posted on February 8th, 2010 admin No Comments

Delta

The delta of the covered call strategy is always positive. This is because the delta of the shares is 1 and therefore if the share price increases by $1.00 so does the profit. The sold call has a negative delta between 0 and 1. The further out of the money the option is sold the more positive the delta is and the more bullish the strategy is. It is also important to watch the delta of the sold call to avoid exercise.

Vega

The aim when selling calls is to sell volatility and time. The covered call strategy is best implemented when the implied volatility is high. You can then sell calls and receive a premium. Once the call has been sold you want the volatility to decrease. This means that if you close out the sold call it will be cheaper to buy back and lock in a profit on the sold call. To identify high volatility there is more information in the Technical Analysis section which can be requested.

Theta

The covered call strategy is designed to profit from selling time. In Topic 1 – Introduction to Options Trading eBook I outlined how time decay affects the option price. This strategy profits from the rapid decay of an options in the last month. Therefore with this strategy the aim is to continually sell one month options to take advantage of time decay.


To learn more about The Covered Call or The Buy – Write Option Strategies please request the Covered Calls eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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