Muinalis way of learning how to trade options
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yes deleted that part as i felt what i stated is not suited me Option Delta
Option Delta measures the change in an option price relative to a change in the underlying price.When Delta is positive that indicates that current position is bullish. If the underlying security goes up in price, the position should make money.
If negative Delta then it indicates a bearish slant.
position Delta tells us how a one point move UP in our stock will effect our position.
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So position option delta will tell us how much money we will make or lose if the “jindalsteel” moves DOWN one point.
Option Gamma
The Greek Gamma that Predicts Delta Acceleration
Gamma tells how your delta is going to change when your underlying changes price. So the two are related...
If your Gamma is positive that means your delta will increase if the underlying security rises in price.
If your Gamma is negative that means your delta will decrease if the underlying security rises in price.
Option Gamma Is The Amount Delta Will Change If Price Moves Up 1 Point
Here is a really
basic example:
Underlying is at 100
Position Delta is 10
Position option Gamma is 5
If the Underlying moves up one point to 101, we will make 10.
see that?
This is because our Delta is positive 10. (Of course if the underlying drops 1 point we will lose 10.)
Remember, position delta tells us how much money will make or lose if the underlying moves up one point.
For learning purposes, once that one point move has occurred, our delta will change.
We can predict this change ahead of time by looking at our Gamma. Our delta will increase by the amount of our Gamma.
Take a look at this chart if “my explaining” is on the weak side.
Notice that each day, the underlying moves up one point. We are assuming this one point move up is just the natural movement of the underlying.
Also notice how the position Gamma determines the new position delta number.
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10+5= 15
15+7= 22
22+10= 32
See how Gamma makes the new delta predictable when the underlying moves up one point? Gamma helps you control your delta risk for future price movements.
Think about this. Let's say we were trading a small amount of money. what if the Gamma was 500 or 1000? Would this be a risky? You bet it would!
Notice “jindalsteel” the Delta is -0.676 and the Gamma is .023. We know that if the underlying price of jindalsteel moves up one point we will lose .67 paise. That’s what Delta is telling us. But what about the next point the market moves up?
This is where Gamma comes in. In our case the Gamma is 0.023 This means after a one point up the Delta will change by .023(that would be -0.653). Option Gamma is important, but it's just one of the greeks you should study.
What does a Spreading Strategical Option Trader do ?
In a perfect world of option trading , we would like to remain close to Delta Neutral while making income trades. This means keeping a Delta of 0.
This way if the market moves in either direction we will not lose or gain any money.(from price movement) Remember, we like to make money simply by time passing (positive theta)!
Read more: http://www.investopedia.com/
http://www.strategic-options-trading.com
www.optionsplaybook.com
someother sites
Option Delta measures the change in an option price relative to a change in the underlying price.When Delta is positive that indicates that current position is bullish. If the underlying security goes up in price, the position should make money.
If negative Delta then it indicates a bearish slant.
position Delta tells us how a one point move UP in our stock will effect our position.
Uploaded with ImageShack.us
So position option delta will tell us how much money we will make or lose if the “jindalsteel” moves DOWN one point.
Option Gamma
The Greek Gamma that Predicts Delta Acceleration
Gamma tells how your delta is going to change when your underlying changes price. So the two are related...
If your Gamma is positive that means your delta will increase if the underlying security rises in price.
If your Gamma is negative that means your delta will decrease if the underlying security rises in price.
Option Gamma Is The Amount Delta Will Change If Price Moves Up 1 Point
Here is a really
basic example:
Underlying is at 100
Position Delta is 10
Position option Gamma is 5
If the Underlying moves up one point to 101, we will make 10.
see that?
This is because our Delta is positive 10. (Of course if the underlying drops 1 point we will lose 10.)
Remember, position delta tells us how much money will make or lose if the underlying moves up one point.
For learning purposes, once that one point move has occurred, our delta will change.
We can predict this change ahead of time by looking at our Gamma. Our delta will increase by the amount of our Gamma.
Take a look at this chart if “my explaining” is on the weak side.
Notice that each day, the underlying moves up one point. We are assuming this one point move up is just the natural movement of the underlying.
Also notice how the position Gamma determines the new position delta number.
Uploaded with ImageShack.us
10+5= 15
15+7= 22
22+10= 32
See how Gamma makes the new delta predictable when the underlying moves up one point? Gamma helps you control your delta risk for future price movements.
Think about this. Let's say we were trading a small amount of money. what if the Gamma was 500 or 1000? Would this be a risky? You bet it would!
Notice “jindalsteel” the Delta is -0.676 and the Gamma is .023. We know that if the underlying price of jindalsteel moves up one point we will lose .67 paise. That’s what Delta is telling us. But what about the next point the market moves up?
This is where Gamma comes in. In our case the Gamma is 0.023 This means after a one point up the Delta will change by .023(that would be -0.653). Option Gamma is important, but it's just one of the greeks you should study.
What does a Spreading Strategical Option Trader do ?
In a perfect world of option trading , we would like to remain close to Delta Neutral while making income trades. This means keeping a Delta of 0.
This way if the market moves in either direction we will not lose or gain any money.(from price movement) Remember, we like to make money simply by time passing (positive theta)!
Read more: http://www.investopedia.com/
http://www.strategic-options-trading.com
www.optionsplaybook.com
someother sites
Last edited:
Option Theta
Option Theta or Theta measures the amount of time decay of a option. Remember options are wasting assets.That means at some time in the future, they will have no value.
So, every option that is purchased is losing value. (assuming option price and volatility remain unchanged) This is why you will sometimes hear traders say: "options are made to be sold".
I Would Have To Agree. It Is Really Difficult To Make Money Consistently By Buying Options
The Theta of every option by itself will be a negative number.
For instance, if an option has a theta of -.50, that means that option will lose .50 in value per day. Of course, it's possible to combine buying and selling options to create a position that is net positive option theta. This mean that the passing of time benefits the position.
In fact, some people refer to as a “time spread” because its main source of profit is from time decay.
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A quick look at this graph may leave you with the conclusion that it is best to sell options that expire in 30 days or less. It is true that the time decay for at-the-money options is greatest the closer you are to expiration.However, as always with options trading, when you gain something, you must give something up. In this case, you are taking on more risk.
It's not "wrong" to sell an 30 day options. Just make sure you understand the risks. And the reward justifies these risks.
Option Vega
Option Vega refers to how an option’s price will change with a change in the volatility of your underlying.
In other words, if your stock price really starts bouncing up and down, then the volatility has increased.This means the Vega increases.
It is important to remember that all options gain value with rising volatility.
This includes calls and puts.
For example, lets say an option has a Vega of .30. This means if the volatility increases by one percentage point, this option will gain .30 in value.
Conversely, if the options volatility drops by one percentage point then this option would lose .30.
A drop in volatility is represented by a drop in Option Vega.
Here is another way of looking at it:
If the same option of "jindalsteel" in the example above has a value of 10.63 at a volatility of 32.8% then at a volatility of 33.8%%, it will have a value of 10.80
Make sense? Clear as mud right?
So what would be the value of this option if the volatility dropped from 32.8%% to 31.8%?
(10.3 - .17 = 10.13)
Another thing to keep in mind: All option's volatility decrease as expiration approaches. It is for this reason that longer term options are far more sensitive to changes in volatility than short term options. Remember, volatility only effects the time value of an option. If you're new to the concept on time value, check out previous pages explaining intrinsic and time value.
Again, the reason for this difference is due to the element of time. The longer an option has till expiration, the more time value that is built into that option.
In addition, a stock has a much greater chance of making a big move in 70 days verses 30 days.
Option Theta or Theta measures the amount of time decay of a option. Remember options are wasting assets.That means at some time in the future, they will have no value.
So, every option that is purchased is losing value. (assuming option price and volatility remain unchanged) This is why you will sometimes hear traders say: "options are made to be sold".
I Would Have To Agree. It Is Really Difficult To Make Money Consistently By Buying Options
The Theta of every option by itself will be a negative number.
For instance, if an option has a theta of -.50, that means that option will lose .50 in value per day. Of course, it's possible to combine buying and selling options to create a position that is net positive option theta. This mean that the passing of time benefits the position.
In fact, some people refer to as a “time spread” because its main source of profit is from time decay.
Uploaded with ImageShack.us
A quick look at this graph may leave you with the conclusion that it is best to sell options that expire in 30 days or less. It is true that the time decay for at-the-money options is greatest the closer you are to expiration.However, as always with options trading, when you gain something, you must give something up. In this case, you are taking on more risk.
It's not "wrong" to sell an 30 day options. Just make sure you understand the risks. And the reward justifies these risks.
Option Vega
Option Vega refers to how an option’s price will change with a change in the volatility of your underlying.
In other words, if your stock price really starts bouncing up and down, then the volatility has increased.This means the Vega increases.
It is important to remember that all options gain value with rising volatility.
This includes calls and puts.
For example, lets say an option has a Vega of .30. This means if the volatility increases by one percentage point, this option will gain .30 in value.
Conversely, if the options volatility drops by one percentage point then this option would lose .30.
A drop in volatility is represented by a drop in Option Vega.
Here is another way of looking at it:
If the same option of "jindalsteel" in the example above has a value of 10.63 at a volatility of 32.8% then at a volatility of 33.8%%, it will have a value of 10.80
Make sense? Clear as mud right?
So what would be the value of this option if the volatility dropped from 32.8%% to 31.8%?
(10.3 - .17 = 10.13)
Another thing to keep in mind: All option's volatility decrease as expiration approaches. It is for this reason that longer term options are far more sensitive to changes in volatility than short term options. Remember, volatility only effects the time value of an option. If you're new to the concept on time value, check out previous pages explaining intrinsic and time value.
Again, the reason for this difference is due to the element of time. The longer an option has till expiration, the more time value that is built into that option.
In addition, a stock has a much greater chance of making a big move in 70 days verses 30 days.
Option Rho
This is of little concern to the any short term trader. Rho is a risk measure related to changes in interest rates. Rho has to do with option price changes due to changes in interest rates. The longer an option has to expiration the more effect interest rate changes will have. Since we are working with options that expire in 70 days or less, I would advise you to just ignore Rho. We have got enough on our plates with Delta, Gamma, Theta and Vega…
When interest rates rise, call prices will rise and put prices will fall. Just the reverse occurs when interest rates fall. Rho is a risk measure that tells strategists by how much call and put prices change as a result of the rise or fall in interest rates. The Rho values for in-the-money options will be largest due to arbitrage activity with such options. Arbitragers are willing to pay more for call options and less for put options when interest rates rise because of the interest earnings potential on short sales made to hedge long calls and opportunity costs of not earning that interest.
Positive for calls and negative for puts, the Rho values will be larger for long-dated options and negligible for short-dated ones. Strategists who use long-term equity anticipation securities (LEAPS) should take into account Rho since over longer time frames the interest rate share of an option's value is more significant.
This is of little concern to the any short term trader. Rho is a risk measure related to changes in interest rates. Rho has to do with option price changes due to changes in interest rates. The longer an option has to expiration the more effect interest rate changes will have. Since we are working with options that expire in 70 days or less, I would advise you to just ignore Rho. We have got enough on our plates with Delta, Gamma, Theta and Vega…
When interest rates rise, call prices will rise and put prices will fall. Just the reverse occurs when interest rates fall. Rho is a risk measure that tells strategists by how much call and put prices change as a result of the rise or fall in interest rates. The Rho values for in-the-money options will be largest due to arbitrage activity with such options. Arbitragers are willing to pay more for call options and less for put options when interest rates rise because of the interest earnings potential on short sales made to hedge long calls and opportunity costs of not earning that interest.
Positive for calls and negative for puts, the Rho values will be larger for long-dated options and negligible for short-dated ones. Strategists who use long-term equity anticipation securities (LEAPS) should take into account Rho since over longer time frames the interest rate share of an option's value is more significant.
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