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

Re: Options Strategies and Discussions (Nov 09 to Mar 10)

Postby b0rderc0llie » Tue Nov 03, 2009 6:00 pm

kennynah wrote:
iam802 wrote:I can't say when, as a seller, I will be assigned. However, it is fair to say that a smart option trader (or buyer) will not want to exercised this right early.


i agree...in most ordinary circumstances, buyers wont exercise early....not unless :

a) anticipating FOMC to announce an abnormal rate cut...
b) company suddenly declares extra-ordinary dividend pay out...
c) buyer has some other motivation to switch Call for stocks (can be any reason; eg...his mother ask him to do so...)

so basically, whenever one is Short ITM option, one is at the mercy of the heavens... it is called an "OBLIGATION" becos when the buyer wants it...you cannot dont give it...if it is sex...i dont mind..but it will mess up a portfolio...so, I wont usually Short ITM american options...


Haha, u just gave me the reasons. Didn't see it before my last post. For an options trader, I guess you won't want any exercise on your option positions. For me, I am happy to accept an early assignment and look forward to it :)
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Re: Options Strategies and Discussions (Nov 09 to Mar 10)

Postby kennynah » Tue Nov 03, 2009 6:50 pm

Thanks BC....good stuff !!!

b0rderc0llie wrote:Suppose I sell a ATM call option, my position delta will be 1-0.5 = 0.5. If I sell a ITM call, I have a lower delta between 0 to 0.5. If I sell a OTM call, I have a higher delta between 0.5 to 1. So, depending on how much delta I want, I can decide whether to sell a ATM, OTM or ITM call.


Recall that for a Covered Call, we really are hoping that stock price will rise to a targeted Profit Exit point, which should be higher than current stock price; well at least logically, this is what we aim for....right? So, in order for us to profit substantially from a rally, we need +ve Delta, the bigger the overall Delta, the better....

from your above, all ITM Calls will have >0.5 delta, thus any Short ITM Call will have >-ve 0.5 Delta... when combined with the 1 delta Long stock position, the overall Delta will be less < +ve 0.5 delta.... ( 1 - > 0.5 = < 0.5)
now, compare choosing the ATM, the overall delta is ~ +ve 0.5 (1 - 0.5 = 0.5) and with a Short OTM Call, the overall delta will be > +ve 0.5 (1 - <0.5 = > 0.5)

to summarize : when combine with existing Long stock position, the overall Delta will vary according to the choice of ITM, ATM and OTM Calls....

a) If Short ITM Covered Call = Overall Delta < +ve 0.5
b) If Short ATM Covered Call = Overall Delta = ~ +ve 0.5
c) If Short OTM Covered Call = Overall Delta > +ve 0.5

Just based on this above, it appears that choosing the OTM Call to establish the Covered Call is most meaningful becos it yields the highest overall +ve Delta....

b0rderc0llie wrote:For theta, the ATM call has the most time premium and the more we go ITM or OTM, the less time premium we get.


Theta is the name of the game for Covered Calls... we are trying to earn extra income by selling the Call against the existing Long stock... and intention is indeed to profit from the decay of the extrinsic value of the option...via Theta, or aka time decay.
Indeed, ATM options have the highest extrinsic value vs ITM and OTM options; ie. all of the value of the ATM options are "external" premium above parity.
However, choosing the ATM Call to WRITE against existing stock position, is as good as selling your stock away at current market price. So, why bother to establish a derivative position, if it cannot offer any benefit?
Time decays the premium of the ATM position not in one day but over a period of time. It is in fact always true that decay is only very aggressive during the last days of the option lifespan. Thus, with a Short ATM Call with 30 days to expiration, the seller will not actually realize the positive effect of theta until several weeks later; ie, the seller wont start seeing significant profits derived from Theta initially. By then, stock price could have moved significantly away from the original ATM strike and can cause serious damage to overall Covered Call position.

Also choosing the ATM Call means that one is not expecting to capture more profits from any possible rally...if so, better just sell the stock away and establish a Naked Short Call option position...might as well free up your capital from the stock sale...use a portion of it to margin this naked Call position...

So, there must be a balance between how much OTM one should go out when choosing to sell a Covered Call and the premium available for the risk adopted and the commission fees paid to sell that option.

b0rderc0llie wrote:Selling nearer dated calls gives us higher theta, and selling further dated ones gives us lower theta.


Concur... further dated options of the same strike will always contain more extrinsic value but lower rate of decay; ie smaller Theta compared to nearer dated options...
what is important to note is that further dated OTM option will also have higher Delta... now, the complexity comes into play. An option having a higher Delta, is loosely judged to have more chances getting ITM by expiration. For example:

CROX is trading at $8, so these OTM Calls may have these delta profile
$9 strike - 30 days expiration Call = 0.3 delta
$9 strike - 75 days expiration Call = 0.4 delta

This is because in 75 days, there is more chance that this OTM Call can become ITM if CROX starts rallying above $9... but with only 30 days, that chance of it happening is lesser...

So, if I choose a further dated OTM Call, I risk my existing Long CROX shares being "called away" but my risk of this happening is lesser when I choose the 30 days expiration Call to sell. However, the overall premium of the 30 days option will definitely be lesser than the 75 days option premium.

Thus, again, there is a trade off to consider.

However, as a general rule of thumb, most Sellers will opt for nearer dated options to WRITE.... so as to lower the risk of that option becoming ITM....less time = less chance of CROX rallying past $9...


hmmm....no discussion on Gamma and Vega effect on this Covered Call situation ?
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Re: Options Strategies and Discussions (Nov 09 to Mar 10)

Postby kennynah » Fri Nov 06, 2009 4:55 pm

a trivia quiz.... to keep this thread going....

Assuming today, an option position's Greeks profile is as such:

Delta : + 0.7
Gamma : + 0.018
Theta : - 0.02
Vega : + 2.15


Question :


In order to be profitable, do you want your underlying's price :

a) To move or stay rather stagnant? Why?
b) To move in which direction? Why?

Enjoy :)

Prize : An audition to become the Host for Discovery Channel's latest program : " What are your Optons?" 8-)
Note : to qualify, entries must be submitted by 9 Nov 2009 1700hrs +8 GMT (no need for video clips)
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Re: Options Strategies and Discussions (Nov 09 to Mar 10)

Postby kennynah » Mon Nov 09, 2009 8:47 pm

well.... i guess, the quiz must be too easy for everyone here... cos' obviously no one is feeling challenged enough to offer any submissions... which is good... it just shows that i am in great company of traders/investors...

but just to close off this above...rather than to leave it stuck in no motion...

here's what i think could be the answer :

Assuming today, an option position's Greeks profile is as such:

Delta : + 0.7
Gamma : + 0.018
Theta : - 0.02
Vega : + 2.15


Question :

In order to be profitable, do you want your underlying's price :

a) To move or stay rather stagnant? Why?
K : i want this baby to move, rather than stagnant...
The reason is primarily due to the heavy "+ve delta". Clearly, we want the option value to increase with a larger delta caused by +ve Gamma as underlying move in the desired direction. In fact, because this position has a -ve Theta, if the underlying stays stagnant, the position will lose some value with each passing day.
A note the "+ve vega", which is not quite as big determining factor since it is a mere +ve 2.15, BUT it can become a risk if it starts to gain in momentum... whether, this +ve Vega is for or against this position, is very dependent on whether this is a Call or Put position. Obviously, due to the large +ve Delta value, it should be clear that this position is either a Long deep ITM Call or Long deep ITM Put.
If it is a Long ITM Put, and if price MOVES favourably, it must be that price moved DOWN.... and when prices DROP, Implied Volatility will INCREASE...and with a +ve vega, this INCREASE in IV will INCREASE this option value...becos the +ve vega ADDS value to the Long ITM Put position.
However, if this was a Long ITM Call, this +ve vega is AGAINST this position, even if the price of the underlying INCREASES... the reason is that normally, when prices go up, IV will DECREASE...and with a lower IV, this Long ITM Call starts losing value by the amount of +ve vega...
So, in short, more often than not, a Long Put with a +ve vega is a better deal if price falls than a Long Call with a +ve vega when price rises...


b) To move in which direction? Why?
K : This above GREEKS profile suggests that this position is either a Long ITM Call or Long ITM Put. Hence, direction preference is obviously dependent on directional bias of this option position.


frankly...i am hoping, i didnt screw up my answers above :shock: hahaha... :D
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Re: Options Strategies and Discussions (Nov 09 to Mar 10)

Postby iam802 » Mon Nov 09, 2009 10:10 pm

It is too difficult for me.

You need to slow down :)
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 (Nov 09 to Mar 10)

Postby kennynah » Mon Nov 09, 2009 10:20 pm

802 :

ok...noted... maybe we should just stick to the basics of the Greeks for now.... ie, we go back to discussing the fundamentals of Delta, Gamma, Theta and Vega....

it may be repetitive but i think it is crucial that option traders can speak Greek fluently, as if it is mother tongue..and no matter how long one has been trading options, it should never be too tiresome to speak Greek....

they tell me, that the learning process includes, reading, writing, speaking and listening...

so 802, how about you start writing your story about the 4 major Greeks... ;)

let's use SPY trading at $108.20 with 11 days to expiration....the following Greeks for a Long Nov 109-strike Call are :

Delta : +0.41
Gamma : +0.1
Theta : -0.06
Vega : +0.08
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Re: Options Strategies and Discussions (Nov 09 to Mar 10)

Postby kennynah » Sun Nov 15, 2009 7:58 pm


let's use SPY trading at $108.20 with 11 days to expiration....the following Greeks for a Long Nov 109-strike Call are :

Delta : +0.41
Gamma : +0.1
Theta : -0.06
Vega : +0.08


a quick reference to this and then we move on to more specific Greek talk..

the above is a Bullish directional option position, which was established by paying a premium of ~$1.91 or $191 for 1 contract size.. this is evident from Delta, which is +ve 0.41.. this also represents the position's biggest risk..

Delta Risks
why is this +ve 0.41 delta, the biggest risk? for one primary reason; if SPY moves up or down 1point, this position gains or loses $41 (0.41 x 100)respectively. this is a 21.5% fluctuation in the P/L; a significant % by any measurement.

therefore, before anyone goes Buying single directional options, whether Long Calls or Long Puts, the trader MUST understand Delta risks... which is most prevalent for Long Calls and Puts.

Gamma Risks

a +ve gamma is always associated with any Long options. remember, +ve gamma has nothing to do with directional bias. this means, one can Long Call or Long Put, such positions will always yield a +ve gamma. as long as you BUY an option, you will be +ve gamma; and conversely, as soon as you are Short(sell or write) an option, you will be -ve gamma.

gamma is best explained vis-a-vis delta. they are a pair of Siamese twins...because delta of an option position changes ONLY because gamma changes it. if gamma is 0(zero), no amount of movement of the underlying will change the delta value of that option !!!

in this example above, this Long SPY 109 Call assumes a +ve 0.1 gamma risk. how so? recall that gamma changes delta. gamma either makes a delta bigger or smaller. in this example, if SPY moves up 1 point, this Long 109 Call delta becomes +ve 0.51 (0.41 + 0.1) and if SPY drops by 1 point, the same Call option value will drop by +0.31 (0.41 - 0.1). of cos, this is a simplified calculation, becos gamma itself changes as SPY moves about. but we will keep it simpler here.

hence, if SPY moves up by 1 point, gamma helps the 109Call value tremendously by pumping the delta value up by ~24%(from 0.41 to 0.51),making this an even greater delta risk play. similarly, if SPY drops by 1 point, the option value will drop by ~23%..

therefore, if you are very bullish and decide to purchase a Long Call option, you want a large enough +ve gamma, to help you increase your +ve delta. BUT you had better be right on your directional bias, because if you were wrong, a large +gamma can also quickly erode your +ve delta of your Long Call option position, making it less sensitive of subsequent upward price movement of the underlying.

this, in a gist, is what gamma risks is all about...

Theta and Vega Risks...after dinner...
but if you wana help me out here...even better...
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Re: Options Strategies and Discussions (Nov 09 to Mar 10)

Postby kennynah » Mon Nov 16, 2009 6:46 pm

let's use SPY trading at $108.20 with 11 days to expiration....the following Greeks for a Long Nov 109-strike Call are :

Delta : +0.41
Gamma : +0.1
Theta : -0.06
Vega : +0.08


Theta Risks

Theta is defined as the Rate of "Decay" of any option's extrinsic premium.

A side note on option premium. All options value are composed of intrinsic and extrinsic values. For example, recall that this Long SPY Nov 109 Call is valued at $1.91, when SPY was trading at $108.20. This is an OTM Call. This $1.91, the value of this Call option, consists of $0 Intrinsic value and $1.91 of Extrinsic value.

All OTM options contain only extrinsic values. ONLY ITM options contain intrinsic values.

Thus, when you purchase this 11days to expiration Long SPY Nov 109 Call, and paid $1.91, all of this is "time" fee. This is "fair" because option is a leveraged instrument, allowing you to gain control of 100 SPY shares at a fraction of the cost of actually buying SPY shares. The tradeoff, is that you pay such extrinsic value, build into the SPY options. Option trading epitomizes the saying "There ain't never a free lunch in this world !!".

Theta affects ONLY the option extrinsic value, NEVER the intrinsic value. In this example, there is $191 worth of premium to be decayed.

So, as with the above example, with a -ve 0.06 Theta, with every passing day, this option decays by $6 (0.06 x 100). You would have noticed an anomaly by now. Given that this option has only 11 days to expiration, doesn't it mean that there is only $66 ( $6 x 11 days) of decay, but with an extrinsic value of $191. So how is this possible? This is possible, because Theta does not decay in a Linear fashion. In fact, the rate of decay (aka Theta) becomes larger as time to expiration nears. It accelerates very aggressively in the last days and last moments of the option's life !!!

A very important lesson about Theta is this...

Supposing you did purchase this Long SPY Nov 109 Call and paid $1.91 and on the final day of expiration, SPY settles at $110. One would imagine making a profit from this position. This cannot be further from the truth. In fact, if SPY had ended at $110 at expiration day, this position would make a loss. By how much?

Value of 109 Call option on expiration, with SPY trade close at $110, will have a value of exactly $1. That Long SPY Nov 109 Call can be exercised into 100 shares of SPY shares at $109 and immediately be sold off in the open market for $110, profiting $1. Of cos, this Call option will be valued at $1 exactly, no more, no less..."No free lunch mantra, remember"....

So, with this SPY Call worthy of $1, and yet you paid $1.91 for it 11 days ago...tell me, how could be be a profitable trade? It is a bigger-than-burger-king-big-whopper loss of 48% !!!

But wait...just when you think this is bad...I've got worse news...Supposing SPY on expiration day closed off at $109, that Long SPY Nov 109 Call would be worth $0 !!! All of that $191 paid for that Long Call option, miraculously vanished into thin air. Talk about frustration! You've got your market direction right, no doubt about that. You entered the trade when SPY was $108.20, and 11 days later, SPY did rise to $109, and yet, you lost 100% of your capital on this trade. Ain't this a sucker trade !! Bitch it all on -ve Theta.

Now, I believe Theta has your attention and respect (sing that song...R-E-S-P-E-C-T by Donna Summers) .......this is what Theta risks is all about.... in this case, contrary to popular saying, time is not money...instead, time is your foe, when you are -ve Theta...
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Re: Options Strategies and Discussions (Nov 09 to Mar 10)

Postby kennynah » Fri Nov 20, 2009 5:41 pm

More about Greeks.... it will be clearer once we go through this exercise...


SPY is at 109.82 on 19Nov09

MCQs :

a) Delta of (Dec09 105 Call) > Delta of (Feb2010 105 Call)
b) Delta of (Dec09 105 Call) < Delta of (Feb2010 105 Call)

c) Gamma of (Dec09 100 Put) > Gamma of (Feb2010 100 Put)
d) Gamma of (Dec09 100 Put) < Gamma of (Feb2010 100 Put)

e) Theta of (Feb09 110 Call) > Theta of (Feb09 100 Call)
f) Theta of (Feb09 110 Call) < Theta of (Feb09 100 Call)

g) Vega of (Dec09 108 Put) > Vega of (Feb2010 108 Put)
h) Vega of (Dec09 108 Put) < Vega of (Feb2010 108 Put)


this is an open book quiz...so, feel free to flip through realtime option chains to check up the answers...

for option traders to be successful, they need to have basic understanding of how Greeks are inter-related with each other. Greeks do not stay static, their values are constantly changing. These moves in greeks change the value of the options and that affect our P/L...

Remember, Greeks are affected primarily by 1) movement of underlying 2) time 3) volatility 4)interest interest rate and 5) dividend (if any)

But since Interest Rates do not fluctuate often, and dividend payouts can be anticipated most times, the remaining 1), 2) and 3) are more critical factors that affect option values..
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Re: Options Strategies and Discussions (Nov 09 to Mar 10)

Postby teachme » Sun Nov 22, 2009 2:34 pm

Hi kennynah,

I hope you would not mind me diverting the options discussion away a bit.
Recently, I made my first options purchase and bought SPY put options (no beginners' luck!! Lost money again!!). Then, I noticed there are SPX options.

May I know what is your preference? SPY and SPX options?
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