Options Strategies & Discussions 02 (Oct 09 - Dec 18)

Options Strategies & Discussions 02 (Oct 09 - Dec 18)

Postby kennynah » Wed Oct 14, 2009 10:34 pm

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?
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Re: Options Strategies and Discussions

Postby iam802 » Wed Oct 14, 2009 10:49 pm

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?
1. Always wait for the setup. NO SETUP; NO TRADE

2. The trend will END but I don't know WHEN.

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The Ichimoku Thread | Option Strategies Thread | Japanese Candlesticks Thread
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Re: Options Strategies and Discussions

Postby kennynah » Wed Oct 14, 2009 11:08 pm

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 ;)

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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
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Re: Options Strategies and Discussions

Postby iam802 » Wed Oct 14, 2009 11:14 pm

You ask very good questions.

I have to think hard and explain to myself (hence, convince myself that is how it seems to be...)
1. Always wait for the setup. NO SETUP; NO TRADE

2. The trend will END but I don't know WHEN.

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The Ichimoku Thread | Option Strategies Thread | Japanese Candlesticks Thread
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Chaoda Modern Agriculture 0682

Postby kennynah » Wed Oct 14, 2009 11:15 pm

lithium wrote: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 :lol:


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... 8-)
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Re: Chaoda Modern Agriculture 0682

Postby lithium » Thu Oct 15, 2009 3:59 am

kennynah wrote:
lithium wrote: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 :lol:


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... 8-)


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 :D
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Re: Chaoda Modern Agriculture 0682

Postby kennynah » Thu Oct 15, 2009 4:03 am

lithium wrote: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 :D


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...
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Re: Options Strategies and Discussions

Postby kennynah » Sat Oct 17, 2009 8:04 pm

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) ?
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Re: Options Strategies and Discussions

Postby lithium » Sat Oct 17, 2009 9:11 pm

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

And it's a full time job

Hopefully the return of investment is there :lol:
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Re: Options Strategies and Discussions

Postby kennynah » Sun Oct 18, 2009 8:37 pm

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 ...
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