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

Re: Options Strategies and Discussions

Postby kennynah » Mon Oct 19, 2009 10:31 pm

to cont and complete the quiz...

Bullish options positions will yield which result and why ?

Quiz Answer :-
Can be +ve or -ve Vega, depending on Long or Short option positions respectively... (credit to BorderCollie)

Long Option positions = +ve Vega
Short Option positions = -ve Vega

Do not confuse Long and Short to mean Bullish and Bearish...It does not equate


In the Greek language, Vega is not found. Vega is the name of a cosmic star... Nevertheless, Vega influences option values.

Briefly, Vega dictates how much the option value will change for 1% change in Implied Volatility of the underlying. Suppose the Long $45 Call has a Vega of 0.04, then with an increase of 1% of Implied Volatility of the underlying, the value Long $45 Call will increase by 4 cents. Correspondingly, a drop of 1% in IV will cause the value of this Call to decrease by 4 cents as well...

Whether it is Long Call or Long Put, we want price to move in our desired direction. We certainly do NOT want price to stay stagnant. If price gyrates very little; ie. Volatility drops, then the Long Call and Long Put value will diminish over time. To be more specific, here Volatility is referring to Implied Volatility of the underlying.

You will have subtly noticed that there could be a scenario that a Long Call option can increase in value even when price of underlying drops marginally. This happens when IV explodes to the upside, so much that the Vega positively adds to all options value to mitigate the loss of intrinsic value of the options. Many Option Traders prosper and become pauper by Vega !! This is how critical Vega is in the Land of Options....

Thus any Long options positions will have +ve Vega; commonly known as Long Vega positions. Conversely, when I'm Short an option position, I really want price of underlying to go no where, preferably, stay perfectly still. If this happens, over time, I will collect of all the premium from the WRITING that option. Thus, all Short option positions have -ve Vega. Hence, during cocktail parties, when someone says:"I am net short vegas", that means his option portfolio is overall net Short options. He wants market to be tame, not wildly swinging...
Options Strategies & Discussions .(Trading Discipline : The Science of Constantly Acting on Knowledge Consistently - kennynah).Investment Strategies & Ideas

Image..................................................................<A fool gives full vent to his anger, but a wise man keeps himself under control-Proverbs 29:11>.................................................................Image
User avatar
kennynah
Lord of the Lew Lian
 
Posts: 18582
Joined: Wed May 07, 2008 2:00 am
Location: everywhere.. and nowhere..

Re: Options Strategies and Discussions

Postby kennynah » Mon Oct 19, 2009 10:42 pm

To summarize, GREEKS are very important in Options Trading... to not understand meticulously how individual GREEK impact the value of options, is perilous :!: :!:

In case you've been wondering why you've not had to know about GREEKS, even when you've been trading Asian listed Warrants for the last century? Wonder no more... the GREEKS are all embedded in those warrants and are absolutely OPAQUE to warrant retail players ... this means the non-transparency allows the warrant issuing institutions to alter any and all of the GREEKs at their sole discretion to benefit THEM not you !!!

This is the ONLY reason that I do not ever trade Asian warrants... in the long run, it is as good throwing away money into the long kang :?
Options Strategies & Discussions .(Trading Discipline : The Science of Constantly Acting on Knowledge Consistently - kennynah).Investment Strategies & Ideas

Image..................................................................<A fool gives full vent to his anger, but a wise man keeps himself under control-Proverbs 29:11>.................................................................Image
User avatar
kennynah
Lord of the Lew Lian
 
Posts: 18582
Joined: Wed May 07, 2008 2:00 am
Location: everywhere.. and nowhere..

Re: Options Strategies and Discussions

Postby iam802 » Mon Oct 19, 2009 11:36 pm

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


These questions are very good to help me pass time. Almost like wrecking my brain to solve my kid's maths problems.

Because when you have a Synthetic Long, you need to pay a premium for the CALL.

So, for a stock that is trading at $50, a 'Long Stock' position starts making money so long as the price is above $50.

But, for a Synthetic Long, you only start making money after it has went up by the premium paid (current stock price + premium paid for CALL).
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
User avatar
iam802
Big Boss
 
Posts: 7269
Joined: Wed May 07, 2008 1:14 am

Re: Options Strategies and Discussions

Postby kennynah » Mon Oct 19, 2009 11:42 pm

802 :

you have inadvertently brought up a VERY important concept about Options...which if you allow me, we will be discussing this in more details shortly (which can mean from tomorrow to next Mar 2010...depending on mood..wahahahaha)

all the same, you are very right to point out that the additional price to pay for a Synthetic Long is a "fee" above parity (aka fair) value of the option... this indeed is one disadvantage of Long Synthetic vs Long Stock....hooray !!!

another trade off of a Synthetic Long is that this position does NOT attract Dividend Payouts, if any....

yet another trade off for paying much lesser upfront on Synthetic Long vs Long Stocks, is that all Options positions have a limited lifespan, amounting to the Theta decay

But there are more reasons for and against Long Synthetics vs Long Stocks... any more?
Options Strategies & Discussions .(Trading Discipline : The Science of Constantly Acting on Knowledge Consistently - kennynah).Investment Strategies & Ideas

Image..................................................................<A fool gives full vent to his anger, but a wise man keeps himself under control-Proverbs 29:11>.................................................................Image
User avatar
kennynah
Lord of the Lew Lian
 
Posts: 18582
Joined: Wed May 07, 2008 2:00 am
Location: everywhere.. and nowhere..

Re: Options Strategies and Discussions

Postby kennynah » Sat Oct 24, 2009 2:24 pm

to expand on what 802 pointed out as a major point about Synthetic Long vs Long stock position....

802 wrote:Because when you have a Synthetic Long, you need to pay a premium for the CALL.


802 mentioned about net "premium" to be paid for the Long Call + Short Put = Synthetic Long Stock

what this means is that one has to pay more for the Long Call than credit received from the Short Put.

but why is there any need to pay for "premium" when the Call and Put are exact the same Strike of the same month expiration, when the stock is also equal in value to Strike? ie. Why should the premium for the $50 Call <> premium for a $50 Put when ABC is trading at $50? Logically, both the Call and the Put should have the same value, since ABC price has 50% chance of moving up or down... to say that Call has more premium, may imply that ABC has more chance of moving up and if Put has more value, can imply ABC has more chance of losing value....BUT this is a very WRONG interpretation...

to explain this above phenomenon where Call premium is more than Put premium, we have to explain the concept of Interest Rate....

suppose you decide to buy 100 shares of ABC at $50 today, you will need to pay $5000 upfront for this stock (if no margin is used). this $5000 could have been placed in a money market that pays some Interests...

but recall, that we have established that for all intents and purposes, a Synthetic Long Stock has the same risk and reward profile as a Long Stock.... and so, if I could establish a Synthetic Long Stock position without having to payup such $5000, I should without a 2nd thought....

but we know that there's no such thing as a free lunch...and so, that Synthetic Long Stock position has to "pay upfront" such Interests that can be earned from the $5000 placed in the bank....mitigating any advantage accorded to the Synthetic Long Stock position..... it is fair....

now, when we relook at the Put-Call Parity equation, you will see the relevance...

Long Call + Short Put = Long Stock - StrikeValue + Interest (here, we omit the Dividend component)

Long Call + Short Put = $50 - $50 + Interest

==> Call Premium ($ you pay for that Long Call) - Put Premium ($ you receive for Short Put) = Interest


In english, this means, that the Call Premium will always contain an "interest rate" component, that makes it more than the Put Premium.....

Hence, a Long Synthetic Stock position, will also cost "more" upfront than a Long Stock position
. This is partly caused by "Interest" component. Therefore, when Fed increases o/n rates, such Synthetic Long Stock position, will "cost more"....BUT such "upfront cost" is almost always smaller than payment for the stock. This is called LEVERAGE....
Options Strategies & Discussions .(Trading Discipline : The Science of Constantly Acting on Knowledge Consistently - kennynah).Investment Strategies & Ideas

Image..................................................................<A fool gives full vent to his anger, but a wise man keeps himself under control-Proverbs 29:11>.................................................................Image
User avatar
kennynah
Lord of the Lew Lian
 
Posts: 18582
Joined: Wed May 07, 2008 2:00 am
Location: everywhere.. and nowhere..

Re: Options Strategies and Discussions

Postby kennynah » Sat Oct 24, 2009 2:37 pm

therefore, to summarize

what are the advantages of a Synthetic Long Stock vs Long Stock ?


a) Leverage
b) Less capital outlay
c) Higher ROI (if profitable)


and disadvantages ?

d) Pay up "interest" now
e) limited lifespan
f) Higher Risk (remember, it is a leveraged position)
g) do not receive dividends for dividend paying stocks
Options Strategies & Discussions .(Trading Discipline : The Science of Constantly Acting on Knowledge Consistently - kennynah).Investment Strategies & Ideas

Image..................................................................<A fool gives full vent to his anger, but a wise man keeps himself under control-Proverbs 29:11>.................................................................Image
User avatar
kennynah
Lord of the Lew Lian
 
Posts: 18582
Joined: Wed May 07, 2008 2:00 am
Location: everywhere.. and nowhere..

Re: Options Strategies and Discussions

Postby kennynah » Sat Oct 24, 2009 3:51 pm

Esquire magazine completed their discussion on how they like to reward 802 and BC for their contributing answers to one of the earlier Quizzes....

it was decided that the following would commensurate....

I hope you guys are happy with your "girls"....wahahahahaha...

Image

personally, i thought 802 should have 2 of the 4 girls...given that he has answered more questions but unfortunately, this "prize" was for just one of the quizzes... so, here's the other "prize" for 802....

Image

and this will eventually lead us to discussing one Option Strategy, "Butterflies".... :mrgreen:
Options Strategies & Discussions .(Trading Discipline : The Science of Constantly Acting on Knowledge Consistently - kennynah).Investment Strategies & Ideas

Image..................................................................<A fool gives full vent to his anger, but a wise man keeps himself under control-Proverbs 29:11>.................................................................Image
User avatar
kennynah
Lord of the Lew Lian
 
Posts: 18582
Joined: Wed May 07, 2008 2:00 am
Location: everywhere.. and nowhere..

Re: Options Strategies and Discussions

Postby kennynah » Sat Oct 24, 2009 4:04 pm

a thread full of words, can be boring and plain irritating to people who are not interested in the topic of discussion...

so, i thought i spruce it up with some pictures...

Image
Options Strategies & Discussions .(Trading Discipline : The Science of Constantly Acting on Knowledge Consistently - kennynah).Investment Strategies & Ideas

Image..................................................................<A fool gives full vent to his anger, but a wise man keeps himself under control-Proverbs 29:11>.................................................................Image
User avatar
kennynah
Lord of the Lew Lian
 
Posts: 18582
Joined: Wed May 07, 2008 2:00 am
Location: everywhere.. and nowhere..

Re: Options Strategies and Discussions

Postby kennynah » Sat Oct 24, 2009 4:16 pm

Image
Options Strategies & Discussions .(Trading Discipline : The Science of Constantly Acting on Knowledge Consistently - kennynah).Investment Strategies & Ideas

Image..................................................................<A fool gives full vent to his anger, but a wise man keeps himself under control-Proverbs 29:11>.................................................................Image
User avatar
kennynah
Lord of the Lew Lian
 
Posts: 18582
Joined: Wed May 07, 2008 2:00 am
Location: everywhere.. and nowhere..

Re: Options Strategies and Discussions

Postby kennynah » Sat Oct 24, 2009 4:21 pm

gamma rays on bruce banner....

Image
Options Strategies & Discussions .(Trading Discipline : The Science of Constantly Acting on Knowledge Consistently - kennynah).Investment Strategies & Ideas

Image..................................................................<A fool gives full vent to his anger, but a wise man keeps himself under control-Proverbs 29:11>.................................................................Image
User avatar
kennynah
Lord of the Lew Lian
 
Posts: 18582
Joined: Wed May 07, 2008 2:00 am
Location: everywhere.. and nowhere..

PreviousNext

Return to Other Investment Instruments & Ideas

Who is online

Users browsing this forum: Google [Bot] and 1 guest