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

Re: Options Strategies and Discussions

Postby lithium » Sun Oct 18, 2009 8:43 pm

Looks like it :lol:
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Re: Options Strategies and Discussions

Postby kennynah » Sun Oct 18, 2009 9:44 pm

let's see if this is enticing enough for participation..

correct answers stand to win free subscription to Esquire featuring Victoria Secrets models 8-)

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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 iam802 » Sun Oct 18, 2009 11:20 pm

I will take the easy one.

Theta (time decay)

When you buy a call or put, you are buying time. A bet that the counter will move in a certain direction within a limited timeframe.

Hence, the option buyer loses time. In other words, negative.

Whereas, if you sell time, the option buyer is losing time. Hence, to the option seller, it should be positive.

Now, I keep my fingers crossed and wait for confirmation if it makes sense.
1. Always wait for the setup. NO SETUP; NO TRADE

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

TA and Options stuffs on InvestIdeas:
The Ichimoku Thread | Option Strategies Thread | Japanese Candlesticks Thread
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Re: Options Strategies and Discussions

Postby kennynah » Mon Oct 19, 2009 12:05 am

living up to a true options trader's call.... 802 is again correct :!:
despite the intention to distract by purposely by using "Bullish" and "Bearish" terms, it does not cloud a knowledgeable options trader like 802....
however, i'm afraid, to receive that alluring magazine, correctly answering all the questions is required ... :mrgreen:


Long Put (Bearish position) = -ve Theta
Long Call (Bullish position) = -ve Theta

Short Put (Bullish position) = +ve Theta
Short Call (Bearish position) = +ve Theta


why is Theta important in options trading? it is so, because just as we all mortals die one day, all options will expire one day as well. all options have an associated lifespan. that lifespan is given a value, an "extrinsic" value to be exact. Theta represents the rate of decay of that extrinsic value.

in general, the longer an option has to expiration, the slower its rate of decay per day. BUT the longer dated options will also always have larger extrinsic values when compared to the nearer dated options. for example, all Nov09 options will have lesser extrinsic values compared to Dec09 options. But the Theta (rate of decay) for Nov09 options will be larger than Dec09 options.

to explain this in a way, even i can understand, think of it as this. your neighbour gives you an option to buy his house for $100K. he will likely demand $1K(fictitiously chosen) if he gives you the right to exercise this option in 1 month's time. however, he is likely to demand more, perhaps $2.5K if he now allows you the right to exercise the option within 3 month's time. these $1K or $2.5K is totally "extrinsic", it is not to be offset with the exercise price of $100K(Strike price). this extrinsic value is a price you pay in order to have the right to buy his house at $100K some time in the future....so, the longer the option, the more "extrinsic" value of that option.

now suppose, you decide to pay $1K for the right to buy his house at $100K today. you now have exactly 30 days to make that decision. during this 30 days, you tune in to the housing market condition. day after day, you kept seeing dismal reports on economic data, additional land parcels added to market, plenty of unwanted new condo units, and basically everything that tells you the property market is not picking up but twirling into a downward spiral... obviously, come the end of 30 days, you are likely not going to exercise that option to buy the house at $100K, in especially when you receive your valuation report that says the house is now valued at $95K... and so, your option now expires. and along with it, you have also forgone $1K.

what is the Theta in this case? the Theta is -ve $1000/30days = 33.3 With every passing day, this option lost $33.3 per day.

now suppose, you decide on that 3 month option (Long Call Strike100K), you would have to pay $2.5K. But you figured, you need that extra months because you want to be very certain about the property trend and so, at least a 3 month option is required. however, tough luck, at the end of 3 months, again property market is not rosy and the final valuation shows the house is only worth $98K, so understandably, you do not exercise that Long Call 100K option and let it expire worthless.

what now is the Theta in this case? Theta is $2500/90days = 27.8 With every passing day, this option lost $27.8 per day.

"just a short note that although, it appears that options decay by $33.3 or $27.8 per day, it is not technically accurate. Theta decay is NOT linear. Theta becomes more aggressive as it nears expiration, especially in the last days of its lifespan."

for this reason, most option traders will SELL nearer month options than further out months, even though the further out months have more premium to their options. the reason is that SELLERs will want faster rate of time decay of the extrinsic value; ie a more aggressive -ve Theta value. but more importantly, given enough time, many surprises can happen..with more time, the value of that house could well go beyond $100K, if suddenly the government significantly lowers property taxations.

in the same vein, BUYERS should usually buy longer dated options than shorter lifespan options. all else being equal, Theta is smaller for further dated away options. buying longer dated options allow for more TIME(closely associated with concept of Theta) and thus events to happen in their favour....although, it is more expensive in most cases...
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Re: Options Strategies and Discussions

Postby kennynah » Mon Oct 19, 2009 12:25 am

the remaining 3 ?

Quiz Time :-

Bullish options positions will yield which result and why ?

Theta (+ve or -ve) ..... 802 answer : can be +ve or -ve. Long options = -ve and Short options = +ve
Delta (+ve or -ve) ?
Gamma (+ve or -ve) ?
Vega (+ve or -ve) ?
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Re: Options Strategies and Discussions

Postby b0rderc0llie » Mon Oct 19, 2009 9:56 am

Let me try:

Long Call (Bullish position) = +ve Delta
Short Put (Bullish position) = +ve Delta

Long Call (Bullish position) = +ve Gamma
Short Put (Bullish position) = -ve Gamma

Long Call (Bullish position) = +ve Vega
Short Put (Bullish position) = -ve Vega
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Re: Options Strategies and Discussions

Postby kennynah » Mon Oct 19, 2009 1:10 pm

with BC responding, is there a even need to query the validity of the answers given? 8-) of cos no need lah...

long zhong correct :!: :!:

i am contacting Esquire now to see how BC and 802 can co-share the free subscription.... I'll revert when they revert (read...tan gu gu...wahahahaha.... :mrgreen: :mrgreen: )
********************************************

Long Call (Bullish position) = +ve Delta
Short Put (Bullish position) = +ve Delta


[i]When an Out-of-The-Money (OTM) Call gets In-The-Money (ITM), it must mean that the underlying price has risen; eg. ABC is $10, $12Strike Call is OTM, for $12Strike Call to be ITM, ABC must rise beyond $12.
Initially, when ABC's price was at $10, that $12Strike Call may have a +ve Delta of only 0.3, but when ABC reaches $12.50, the Delta of this same $12Strike Call will have progressively become +ve 0.6; ie, with all Bullish options positions, they possess +VE Delta... Thus, all Bearish option positions will possess -ve Delta
And as such, should ABC drop in price, the Deltas will also correspondingly drop, which will lower the values of the Call options...

*******************************
Long Call (Bullish position) = +ve Gamma
Short Put (Bullish position) = -ve Gamma

******************
Gamma can be seen as the accelerator or decelerator of Delta.
Recall that every option has a delta value. Deltas change as the underlying asset value changes.

For example,

When ABC is $50, $50 Call (ATM Call) will have a ~+ve 0.5 delta. As ABC rises in value to $60, that $50 Call is now Deep ITM, and as such, it will likely have close to +ve 1.0 Delta; ie. this Call option begins to behave just like a stock. Something must cause the gain in Delta value for the $50 Call.
Correspondingly, should ABC trade lower at $40, that same $50 Call is now Deep OTM, practically worthless, and consequently, its Delta could be very close, if not at, 0 Delta.
Hence, Delta values change and is caused solely by Gamma.

Therefore, Gamma is a very important GREEK in Option trading. It causes your option value to rise or fall !!

What every Bullish option position wants, arguably, is as large a +ve Gamma as possible. So that, as the ABC rises, this large +ve Gamma increases the +ve Delta ever more. But as in everything in life, there's a trade off. The trade off being that with a large Gamma, an adverse price movement of the underlying, will also reduce the +ve Delta of that Bullish option position, which consequently reduces the value of that option. You don't want that.

Monitoring Gamma is thus important aspect of risk management. When the entire portfolio comprises too much +ve Gamma, the P/L will swing widely in either direction.

In short, all Bullish option positions will possess +ve Gamma as you want Gamma to increase +ve Delta value as price of underlying increases. Inferencing, all Bearish option positions will possess -ve Gamma as you want Gamma to increase -ve Delta value as price of underlying decreases (primary school math : -ve + -ve = more -ve). Remember, all Bearish option positions will have -ve Deltas. This means, Long Put and Short Call option positions.

Lastly, Gamma is highest for all ATM options and least effective on Deltas for deep ITM and OTM options. Therefore, if you option Strike is very close to the underlying value very close to expiration, you will discover that your P/L will swing wildly. This is all due to Gamma effect. It wont change you into a Hulk, but it can cause you to lose all your profits in seconds...

*******************
the rest of the explanation later.. time for a swim
*******************

Long Call (Bullish position) = +ve Vega
Short Put (Bullish position) = -ve Vega
Last edited by kennynah on Mon Oct 19, 2009 6:56 pm, edited 4 times in total.
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Re: Options Strategies and Discussions

Postby kennynah » Mon Oct 19, 2009 4:20 pm

I am jumping around here and not quite following a logical sequence in introducing Options in this thread... basically, I'm posting whatever that comes to mind..

While, I find some time later to complete the section above this post, I thought we continue with our exploration of Options.. a highly misunderstood and rather poorly understood investment/trading instrument in this part of the world...

To crystallize my own perception, I'm writing next about Synthetics (no, not about less plastics to save the world or that Lycra skirt).

For those of us, who are only investing/trading Equities(Stocks), you should find this topic of some interest and potentially economic value.

Put-Call Parity and Synthetics

Recap :-
Long Call = Long Put + Long Stock - Interest (assuming no dividend payouts)

=> Long Stock = Long Call + Short Put + Interest


When I Long 100 shares of ABC at $50, I would need to pay up $5000 (if no margin is used).

From the above Put-Call Party equation, I can easily establish this 100 shares of ABC, by doing so :

1 contract Long $50 Call + 1 contract Short $50 Put of ABC of the same expiration month. This is known as a Synthetic Long.

note : 1 option contract = 100 shares of securities

Supposing you had to pay $3.50 for this Long Call and receive $1.50 for the Short Put, that means, you pay only $200 ($3.50 - $1.50 = $2 x 1 option contract size) for what seems to be an exact same position as a Long 100 shares of ABC, which would have required $5000 to establish.

Quiz Time

Should you or not establish a Synthetic Long position instead of Long 100 shares of ABC?


PS : This is a forum, and so, it should be done in the spirit of discussion.... It is not a lecture room, and neither am I qualified to be giving one here...
So, if we all discuss, we all benefit...otherwise, this thread will eventually die off and no one will be better off in the end...
Hence.. lai lah... lock in your answers.... 8-)
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Re: Options Strategies and Discussions

Postby iam802 » Mon Oct 19, 2009 6:52 pm

My guess on Synthetic Long.

If you wrong, the loss will be almost the same as the amount when you are right.

And I think that is still fine if proper risk management is in place.

But, I can imagine a lot of people will be thinking, "Well, I have $5000 and now I am buying a contract that cost me only $200. I still have $4,800. Why not I get another 10 contracts!"

And, that is when the risk comes in. If you are wrong, you are now liable for 10 contracts (or 1000 shares). Do you have the money to lose 10 contracts (assume worst case scenario.... think Enron, Worldcom, Lehman, AIG, C, September 11, SARS etc)

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

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

TA and Options stuffs on InvestIdeas:
The Ichimoku Thread | Option Strategies Thread | Japanese Candlesticks Thread
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Re: Options Strategies and Discussions

Postby kennynah » Mon Oct 19, 2009 7:10 pm

iam802 wrote:My guess on Synthetic Long.

If you wrong, the loss will be almost the same as the amount when you are right.


thanks 802 for keeping me company here...you steady !!!

hmmmm... generally, you are to right to say that since a Synthetic Long is similar to a Long Stock position, that both will gain or lose value, when underlying rise or fall respectively.

however, technically, a Long stock has a risk of going to $0, thus, in our example, one can lose all $5000. but a Synthetic Long stands to lose ONLY $200. Although both lose 100% in value, yet a Synthetic Long losses is smaller in absolute terms for the same exposure to upside potential.

so, why then would traders not buy Synthetic Long instead of Long Stock? there must be some trade offs? what would they be ?
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