Options 02 (Oct 09 - Dec 24)

[kennynah]

Moving on....

802 rightly stated that Dividends has a direct influence on option values... This is particularly interesting becos securities do alter their dividend payouts frequently enough...and that decision can have significant impact on its option values....and since it has measurable impact, an options trader must intricately understand the effects ....

The question that's begging to be asked next is, how does dividends payout influence price of Call and Put options?

Quiz

If market expects a certain security to increase Dividends payout, how will this affect its Call and Put option values?

[iam802]

Let's see if my reasoning is correct.

Most dividend paying stock would have the dividend priced in already.
Eg. Stock at $42 with dividend $2 will trade at around $40 once it goes ex-dividend.

Assumption:
- Current month : Oct
- SELL CALL Dec
- Dividend payout in Nov.

Then, will it be fair to say the option buyer (the guy that buys the option from me) will not received the dividends as there is a high chance that he will only exercised the right in Dec and not earlier.

In this case, the price that I sell the CALL option for should 'reduce' by not include the dividend, right?

[kennynah]

802... again, you are the champion.....and congrats, you've just won a basket of 小笼包 from Crystal Jade....as usual, print it and present it to any CJ's outlet but valid only on weekdays except public holidays



i never really thought of it in such a complex manner, and so, you have just educated me...

in a gist, when market expects dividends to go upwards, Call option values will DROP and Put option value will RISE....

the other way of explaining this phenomenon in a methodical and scientific way is to fall back on our earlier Put-Call Parity formula, which states

Call = Put + StrikePrice - StockPrice + Interest - Dividends

Mathematically, it should be easy to envisage that when Dividends rise, Call value DROPS...and when you extrapolate the formula around, it is equally clear that with an increase in Dividends payout, corresponding Put option value INCREASES

[iam802]

You ask very good questions.

I have to think hard and explain to myself (hence, convince myself that is how it seems to be...)

[kennynah]

So far I'm still doing well with FA approach to pick stocks, and TA to get in and out.

Still have not learn your option strategy that can make millions yet

hahahah.... first off, it is not MY option strategy...it is well published if one cares enough to search for it... 2ndly, it is a fallacy that options trading make millions....though not impossible, but so can selling lollipops...

[lithium]

So far I'm still doing well with FA approach to pick stocks, and TA to get in and out.

Still have not learn your option strategy that can make millions yet

hahahah.... first off, it is not MY option strategy...it is well published if one cares enough to search for it... 2ndly, it is a fallacy that options trading make millions....though not impossible, but so can selling lollipops...

OK. Might look into options in future, but not now when my own trading strategy still work, I value my sleep and life at the moment

[kennynah]

OK. Might look into options in future, but not now when my own trading strategy still work, I value my sleep and life at the moment

when you do embark onto the option trading journey.... remember to enjoy the ride...it'll be fun, provided you are prepared to pay some initial tuition fee... but i guess, that's life...ain't nothing for free...

US casino just closed.. have a good rest, our friend from HK SAR...

[kennynah]

as we know, trading options is all about GREEKS..

GREEKS are everything about trading Options....
not understanding GREEKS and trading Options, is like sky diving without parachute training; ie. with dire consequences...

so, let's start off with some recap on GREEKS 101....

Delta(Rate of Change per unit change in underlying) => think of it as DY/DX; ie the slope of a curve

Gamma(Rate of Change of Delta per unit change of underlying) => think of it as D2Y/DX2; ie acceleration or deceleration

Theta(Time Decay) => change to Options Value due to each passing day

Vega(related to Implied Volatility) => change to option value due to 1% change in Volatility


Next, we need to understand the polarity of the GREEKS for Long and Short Options. In order not to confuse anyone, these are examples of Bullish and Bearish options positions. In most Options books, "Long" is widely used to mean "Bullish" and "Short" to mean "Bearish". The followng examples explain :-

Bullish => Long Call....Short Put
Bearish => Long Put.... Short Call



Quiz Time :-


Bullish options positions will yield which result and why ?

Delta (+ve or -ve) ?
Gamma (+ve or -ve) ?
Theta (+ve or -ve) ?
Vega (+ve or -ve) ?

[lithium]

Sounds like we need a Master's degree in calculus to trade Options

And it's a full time job

Hopefully the return of investment is there

[kennynah]

It will be good if one has a PhD in Statistics..but I think pre-university mathematics is sufficient...

Trading options is not necessarily a full time job....but just like investing in equities, whether you need to micro or macro manage your positions, depends on the choice and methods of investing/trading... trading options can both be a full time or a part-time affair...

the ROI is dependent on the skill of the trader/investor... the vehicle itself is not any necessarily more superior or inferior to any other investment instruments...

so, lithium, i am afraid you have been very misinformed about Options ...