Options 02 (Oct 09 - Dec 24)

[kennynah]

for now...maybe we should continue to speak about GREEKS...explore them, tear them apart, dissect them into simpler parts, chew on them, and then perhaps, we have a better appreciation of what these monsters are...and realize they are really not as beastly as they are made out to be....

let's try to be friends with GREEKS....once again...

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in the next post....we do Vega.... how about that?

so how... not keen to discuss ?

[millionairemind]

K Da Ge - When you posts about options, I will surely read.. helps me to understand them better too

[b0rderc0llie]

I think it is easier with equities. In options, one has to care about timing (because of the expiration date), volatility as well as the underlying asset. Even then, the correlation between the underlying asset and the option is not perfect (that's Delta, right? Thank you). In equities, one only has to care about the underlying asset. So much easier.

I do respect people who can make a success out of options because it is much more challenging. May I ask you what characteristics about options that attract you so much to them? Or is it because you are one person who loves a challenge because it is more satisfying?

Although I use options, I do not consider myself to be an options trader as I am interested more in the underlying asset instead of the option. I use options to generate additional returns on my cash, stock and futures positions.

There are 2 scenarios which I encounter very often.

1. Suppose I want to buy shares in American Express Company (AXP). AXP is trading at 35 now. I would like to buy at 34, and I have $34. So, I sell a one month put option on AXP with a strike price of 34. Suppose the premium I get for selling the put option is $1.

At the end of 1 month, if AXP is trading higher than $34, the option will expire worthless. I will earn $1, and it is about a 3% return on my initial capital of $34. If at the end of one month, AXP is trading at $30, then the put option will be exercised, and the AXP shares will be sold to me at $34. The $1 I received as premium will mean I have effectively bought AXP at $33.

2. Suppose I have AXP shares and AXP is trading at 35 now. I would like to sell at 37. So I sell a one month call option on AXP with a strike price of 37. Suppose the premium I get for selling the call option is $1.

At the end of 1 month, if AXP is trading lower than $37, the option will expire worthless. I will earn $1, and I am still holding on to AXP. If at the end of one month, AXP is trading at $40, then the call option will be exercised, and the AXP shares will be bought from me at $37. The $1 I received as premium will mean I have effectively sold AXP at $38.

[kennynah]

thanks BC for sharing your game plan....

in these instances, i agree with BC that it is not option trading per se... he is utilizing option as a complimentary tool to enhance his assets...via naked Short Puts and Covered Calls...

in a more stringent definition of option trading, it deals with trading the option GREEKS; such as profiting from trading theta, gamma scalping(a PhD concept: permanent head damage), vega, through strategies like conversions, boxes, iron condor, calender spreads, diagonal spreads, etc....

however, in BC's case, the Covered Call is actually the "traditional" concept of trading Theta...the decaying of option value as time passes.

but in the most stringent sense, if the option trader is focusing only on trading theta, he would have to be directional unbias. to achieve this, he must be delta neutral, which will require some form delta trading, either by altering stock or option quantity as the underlying price moves, so that the total delta of the position remains flat (or zero)... however, this is usually too expensive bcos of trade commissions... thus for retail traders, the calender spread is just about the closest form of Theta trading....

Example of Calender Spread

AAPL is now at $188.50
Short 18 days expiration $190 Call
Long 46 days expiration $190 Call

GREEKS of this Calender Spread
Delta : +3.22 (why do we have a +ve value? answer below)
Theta : 7.59
Gamma : -1.36
Vega : 16.93

Here, you see that Theta will give this trader a profit of $7.59 with every passing day, everything else excluded.

Delta is comparatively small, meaning that when AAPL rallies or sinks, the option value will not change much. This is especially so when the Gamma is also negligible...with every $1 change to AAPL, delta increases or decreases by a mere 1.36..when compared to the other GREEKS, both Delta and Gamma are smaller consideration for this Calender Spread...

a side note : in this calender spread, we are employing both the $190 Calls, but why then do we end up with a +ve Delta? Shouldn't a Nov expiring $190 Call and the Jan 2010 expiring $190 Call, both have the same Delta value? Obviously, the answer is NO... options with longer expiration date will ALWAYS have a higher Delta value, even if the options are of the same strike. The reason is simple, when i have a longer dated option, i have more chance of this option becoming In-The-Money as compared to an option that will expire sooner. Remember that Delta is loosely regarded as "chance of option expiring ITM"....

But note that Vega is where the risk is ... if Implied Volatility fluctuates 1% up or down, this position will either profit $16.93 or lose $16.93... thus, if AAPL's IV drops by 1%, this trader loses $16.93, which is not sufficiently compensated by the profit from Theta decay...

If this trader were to describe his position in option term, he will say " i am Long vega"... becos he wants Implied Volatility to increase, as that will profit his position... a 10% increase in IV for AAPL shares, he will profit $169.30...

In this example, the trader needs to manage the Vega...but how?

this is what i mean by trading GREEKS.... which includes managing risks presented by the GREEKS of any option position...

[kennynah]

K Da Ge - When you posts about options, I will surely read.. helps me to understand them better too

MM da da ge....lai leh.... share share leh.... dont everytime 真人不漏像

[millionairemind]

I no know so better keep quiet and learn from the gurus in this forum.. if not, later you laugh at what I post. From this to this (bo ge )

[kennynah]

no lah....in all seriousness, everything can be learned from mutual discussion... in all honesty, and this is not compliment seeking, i consider myself at infancy stage of option trading.. i will still need a long time to master option trading... but using this thread, we can all become better at this, if we all participate...
if not much discussion here...i become 寂寞。。。

[iam802]

Jump to Vega....a bit advanced and complicated for me to catch up.

How about we start with something more basic and build up from there?

Example. The role of Covered Call and the difference between a Covered Call ITM and OTM.

What do you think?

[kennynah]

Swee lah. U start

[teachme]

one clear trade off that will always exist, is between Gamma and Theta...they will always be in opposite polarity no matter what...in this sense, it appears to be better off being Short a Call than to Short a Put...reason is, both are +ve Theta and since Gamma will have to be -ve... do you agree ?

You make me nervous when you ask me questions as if I am now your equal. I really catch no ball the first time I read your post. I am sorry ... I did some research using Google and think I understand the inverse relationship between Theta and Gamma but cannot make the connection as to why being short a call is better than short a put.

as to the answers... wah.... champion lah.... you are more than acquainted with your GREEKS.... we must have more exchanges on this thread....

Actually, I thought about the same question last week when I considered about buying a put option. Already done the exam question, so it is not hard to ace the exam:)
My options understanding is limited to simple long strategies. I am basically still a naked man now, still don't know how to cover myself:)

in my mind, it is slightly more advantages to be Long a further out expiration month, mainly for one obvious reason, Theta.... theta decay is slower in further out options than nearer month ones...also to give more time for the position to play out...but you are absolutely right that with further out month option, the Delta is smaller as well for ITM/OTM options (ATM delta will always be around 0.5 whichever month expiration), since a favourable move in underlying will derive a smaller gain for those OTM/ATM option value...which is thus not too advantageous for a Long player... so, there are trade offs between GREEKS...

You're right too. However, considering my trading time-frame, if I have no intentions of going long-term, then I shouldn't buy long-expiration options. Also, if I decide to change my mind later, I can roll over the options.