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Showing results for tags 'options'.
Found 166 results
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The moneyness of an option simply refers to whether the option is profitable (in the money), at breakeven point (at the money) or in a losing position (out of the money).
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This is a modification of the iron condor strategy which allows for profitability to be a function of the asset moving above or below the breakeven price and not just to be limited to a series of prices that form a discernable range.
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Hi folks - I'm hoping someone with more experience can help me get my head around a concept. I'm looking at options trading strategies, and am studying short strangles. Assuming you didn't have the ability to monitor a short strangle 24/7, you'd want to put stop losses on the position. How would one go about doing this using the spot market to render the position neutral at certain trigger points? (i.e. without limit buy/sell orders on the options themselves). So assuming you put down a short strangle on GBPUSD, you would sell a put and a call out of the money, make the premium and wait for expiry hoping the GBPUSD didn't move beyond your strike range. What limit orders should you place in the spot market in order to limit the downside of this otherwise crazy-risky position? Before anyone looks at me askance, I am not currently holding an uncovered short strangle, nor have I ever, this is a theoretical question. Many thanks in advance... Inc.
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This options greek is used to determine how closely an options contract tracks its underlying market, hence is useful for traders who want to track gamma hedged trades.
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Options and commodities are examples of assets where the zero sum game principle is seen. This means that profits made are paid for by losses of counterparties to the profitable trade.
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Selling an option involves shorting an options contract, especially when there is a negative view on the asset to be traded.
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Anyone who sells an options contract or goes short on an options contract is an options writer.
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A positive vomma is a signal to go long on an option, while a negative vomma is a signal to go short on an option.
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Volatility smiles are used mainly in the currency and equity options markets.
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A volatility skew is seen when there are more call-write than put-write orders in the equity markets.
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Volatility quote trading is another option asset that is used to trade market volatility. It is used by advanced traders.
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This is a trade strategy in which the trader holds a position in an option and a contrary directional position in the asset itself. It is a delta-neutral strategy which can be used to balance out response of the asset to market movements when implied volatility declines.
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This is used as a less expensive method of hedging a long option position, usually by large market players such as hedge funds and other institutional investors.
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Hi everyone, Nice to see such an active forum. I'm an Options trader (expert level), and looking forward to interacting with fellow traders. If any of you have questions on Options, please feel free to get in touch with me. Best Hari Swaminathan - OptionTiger
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Writing uncovered contracts can put a writer at significant risks unless the buyer is unable to exercise the option because it is out of the money.
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This is another of the Greek option terms which is used in conjunction with the vomma and vega to make trading decisions in the options market based on volatility.
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This event usually takes place during the last hour of trading on the third Friday of March, June, September and December. It is a short term event and as such, has little or no effect on long term investors.
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It is used as an investment prediction tool, and incorporates the possibility of an asset not changing price during the duration of the option as one of the possible values (in addition to increase or decrease in price.
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Most of the times I prefer to open a bull call spread rather than writing a covered call for the same profit using less capital. Instead of buying the underlying stock in the covered call strategy, in the bull call spread strategy I have to buy deep-in-the-money call options. It is better for me to sell near-month options as time decay is at its greatest for these options. So the two strategies that I am comparing will involve selling near-month slightly out-of-the-money call options. For example let’s say that the stock ABC currently trading at $100 in June and the July 110 call is priced at $4 while a July 90 call is priced at $11.50. If you enter into a covered call write you have to buy 100 shares of ABC at $100 each and sell a July 110 call. The initial investment is $10000 (long stock) - $400 (short call) = $9600. If you enter a bull call spread you can buy the July 90 call while selling the July 110 call. The initial investment in this case is $1150 (long call) - $400 (short call) = $750. Profit/loss at various ABC stock price on expiration date. Strategy Initial Investment Stock Price on Expiration Below $90 $90 $100 $110 & Above Bull Call Spread 750 -750 -750 250 1250 Covered Call 9600 Unlimited -300 200 1400 The maximum potential profit for the bull call spread is only $150 below than the covered call but the covered call has a potentially unlimited downside risk (all the initial investment $9600 in potential losses). So the bull call spread is a superior strategy to the covered call if you are willing to sacrifice some profits in return for higher leverage and significantly greater downside risk.
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My current day trading methodology is an amalgam of volume profile, Market Auction, and VWAP principles. My instrument of choice has been AAPL options. A couple of months ago I made the switch from trading weeklies to a little further out and deep-in-the-money. I just couldn't handle the high rate of time decay anymore. Initially it was a good switch, however recently I have come into a situation where the spread has become problematic. I exclusively use market orders when entering/exit. During the high liquidity part of the day's open, the spreads are awful. For example this morning I had bought some calls on a break above VWAP, the market order was literally 1.40 above the bid. Horrible way to start a trade, especially given that it moved against me. In the past I had always found it difficult to time a limit order with the chart of the underling where I want my entries/exits. With AAPL options, the bid/ask can move extremely fast. At any rate, I was curious what everyone's thoughts were on this matter. I know of a few people having great success trading futures. They have a very structured system and have no issues putting in their orders at particular points in the chart that meet their auction criteria. I feel at times that with options, I'm having to juggle elements that take away from it being a similar "mechanical" trading experience. Thoughts? -
Like a sexy gal that can cook or an inside source at the racetrack, an actionable option strategy prior to an earnings release is something that traders know must be out there, yet it remains elusive. Most investors looking to capitalize on an earnings beat or miss simply buy calls or puts. Some of the more sophisticated speculators even get long both a call and a put (straddle/strangle), thinking that if the stock moves enough one way or the other, they'll come out at least a little bit ahead. Limited Risk – High Reward The allure of only being long calls and/or puts is that a trader knows their maximum risk as soon as they enter the order. If a call on Apple costs $100, then $100 is the most you can lose, plus you have the chance to "rake it in" if Apple moves significantly before the option expires. Therein lies the trouble with most long-side option strategies prior to earnings announcements...since no one knows what the earnings report will hold, or how the underlying stock will react; the demand for options goes up markedly before the announcement. Both speculators and shareholders looking to insure against volatility are clamoring for options which dramatically increases the premiums, making puts and calls overpriced. Being the Bookie Everyone knows that taking bets is more profitable long-term than making bets. Especially if the wager has very favorable odds for the house. This is exactly what overpriced options are for the seller – a game that stacks the deck against the buyer. In general, immediately after earnings are released, the demand for - as well as the volatility premium built into - calls and puts, evaporates. Even those that theoretically have both upside and downside covered find it difficult to profit once that "premium of the unknown" is gone from their asset. So the obvious solution would appear to be: become a seller of options. If only it were that easy! Unless you have the bottomless pockets of a Goldman Sachs, the unlimited risk part of being a naked option seller will be too much for you and your broker's heart to take. Credit Spreads In order to take advantage of the inflated premiums in the option market prior to an earnings announcement, yet mitigate the risk of selling uncovered (naked) puts/calls, the go to strategies are "bull put credit" and "bear call credit" spreads. Rather than getting bogged down in the stock XYZ trading at $50 - type explanation, I'll leave it to a google search for those wanting the nuts and bolts of how to construct the option spreads mentioned above. The focus here is how to maximize the profit from these spreads and that is accomplished in the unwinding. Unwound Once the earnings report comes out and the market is digesting and reacting to the numbers, option prices revert to a more realistic reflection of future prospects. This allows the trader to unwind his pre-earnings position and cash in on the uncertainty that was prevalant prior to the announcement. Does it work every time? No. Does it provide enough profit to get an address on easy street if it's all a trader does? No. But it works often enough and provides a boost to the bottom line to make it a worthwhile play to investigate further.
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Dr. W. Edward Olmstead Olmstead Options Trading Strategies Now that many stocks have weekly options, there are new strategies available to protect the price of a stock following an earnings report. Stocks often experience their biggest declines in price after an earnings report fails to meet the expectations of investors. Weekly options can offer cheap, short-term insurance to lock in a minimum sale price of a stock that might be vulnerable to an earnings setback. It has always been possible to use monthly put options to protect the price of a stock through the date of the company’s earnings report. The problem with monthly puts is that they can be quite expensive, particularly when the expiration date is substantially later than the earnings report. Weekly options are cheaper and offer more flexibility in providing short-term protection. Not all stocks have weekly options, but when a stock does have them, it is prudent to know how to employ them to circumvent an earnings report disaster. A timely illustration of a protective options strategy will be presented for Facebook Inc (FB), which has its next earnings report on January 23. FB stock is currently trading around $26, which represents a nice 30% increase since mid-November. With the company’s earnings report scheduled for January 23, there is concern about losing those recent gains if the report is less than spectacular. Let’s explore an inexpensive strategy to protect the price of FB by using a combination of weekly options. This protective strategy assumes the ownership of 100 shares of FB stock. While this trade may be appropriate for the protection of FB stock purchased at any price, it is designed primarily for stock purchased below the level of $25 per share. It is easiest to present this protective strategy as a combination of two separate trades. The first trade is the purchase of a weekly put that expires two days after the FB earnings report. For 100 shares of FB stock, buy one contract of the Jan 25.5 put that has an expiration date of January 25. The current cost of this put is $1.65 per share. This put will allow you to liquidate your stock for $25.50 per share if the earnings report on January 23 leads to a collapse of the FB stock price. The second part of the strategy is intended to lower the cost basis of the long Jan 25.5 put. In this second trade, sell one contract of the Jan 29 call and one contract of the Jan 24 put, each of which expires on January 18 (these particular weekly options coincide with the monthly options). Currently, the premium received from the sale of these two options is $.75 per share. This sale will reduce the cost basis of long put from $1.65 per share down to $.90 per share. The recent price range of FB stock will likely hold for the next few weeks leading up to the earnings report on January 23. This suggests that the short Jan 29 call and short Jan 24 put will expire worthless on January 18, five days before the earnings report. The residual option position will be long one Jan 25.5 put with a cost basis of $.90 per share that is valid through the week of January 21-25. With the FB earnings report on January 23, there will be two full days after the report to observe the response of the stock price. If the price of FB stock falls significantly after the report, the stockholder will have the choice of either (I) liquidating the stock at $25.5 per share or (ii) selling the Jan 25.5 put for a profit that will offset some of the loss in the stock price. Of course, it is possible that the price of FB stock will be either above $29 or below $24 when the expiration date of the short options arrives on January 18. If the stock price is above $29, the short put will expire worthless and the stock holder can choose to either buy back the short call or allow the stock to be called away for a nice profit. If the stock price is below $24, the short call will expire worthless and the diagonal spread composed of the long Jan 25.5 put and short Jan 24 put can be sold for a profit. While this weekly options strategy was presented as a protection for actual shares of FB stock, it applies equally well for an options position that represents synthetic stock. In an August 2012 blog entry (with follow up commentary), I presented an options approach to safely construct a synthetic long stock position in FB. The protection strategy presented here can be used in conjunction with that synthetic holding. Dr. Olmstead can be found at http://www.olmsteadoptions.com, an on-line options trading site, centered around options education material and option trading strategies he’s developed. He is Professor of Applied Mathematics at Northwestern University, author of the popular and highly-praised options book, Options for the Beginner and Beyond (2006) and former chief strategist for The Options Professor on-line newsletter, distributed by Zacks.com and Forbes.com. -
Traders who carry out a costless collar (zero-cost collar) strategy are betting that the market price will go up for the assets owned in their portfolio. The method fully protects a nine-month to a two-and-a-half-year long position from market downturns, and it costs almost nothing to implement. The technique involves buying LEAP put options and writing (selling) the same amount of LEAP call options for the owned underlying asset. Entering this type of position limits the trader's potential profit. Definition - LEAP Options: Regular options expire in 30 days. Exchanges worldwide created Long-term Equity Anticipation Securities (LEAP) to give people more room to secure their portfolio's long positions. By offering LEAP options, investors can trade puts and calls that expire from nine months to two-and-a-half years. The Differences Between ITM, ATM and OTM for Puts and Calls There are five ways to define the relationship between an option's strike price and the market price of its underlying asset for puts and calls. Understanding the differences between the terms is important when considering the risks involved in implementing a costless collar (zero-cost collar) strategy. Put Options: ITM - In The Money: The underlying asset's market price is less than option's strike price. OTM - Out of The Money: The underlying asset's market price is more than option's strike price. Call Options: ITM - In The Money: The underlying asset's market price is more than option's strike price. OTM - Out of The Money: The underlying asset's market price is less than option's strike price. Both Put and Call Options ATM - At The Money: The underlying asset's market price equals the option's strike price. How to Implement a Costless Collar (Zero-Cost Collar) Strategy XYZ is worth $50 (market price) in June of 2006 1) Trader buys 100 shares of XYZ preferred stock and pays $5000 in June 2006. 2) Trader writes (sells) a call option: XYZ[Jul07]60($5) 50 - 100 shares of XYZ (LEAPS) stock - Strike Price $60 (OTM), expiring in 360 days - Premium Cost of $5 3) Trader buys a put option: XYZ[Jul07]50($5) - 100 shares of XYZ (LEAPS) stock - Strike Price $50 (ATM), expiring in 360 days - Premium Cost of $5 4) Trader pays nothing to enter the market, as the funds received from selling the call cover the amount paid for the put [($500 (received from the call) - $500 (paid for the put)] Total Investment cost in 2006: $5000 [100 (shares) x $50 (XYZ market price)] Result one: XYZ hits $70 in July of 2007 a) The put option expires worthless (OTM). b) The call option is ITM. The call buyer exercises his or her right to buy the writer's 100 shares at $60, and pays $6000 to the trader. c) The trader makes a total profit of $1000 after subtracting the total investment cost from the profit made on the call. [$1000 = $6000 (profit from call) - $5000 (cost of investment)] Result two: XYZ hits $40 in July of 2007 a) The call option expires worthless (OTM). b) The put option is ITM. The trader exercises his or her right to sell 100 shares at $50 and receives $5000 his or her shares. c) The trader loses nothing, since the amount received from the put equals the total cost of investment. [$0 = $5000 (received from put) - $5000 (cost of investment)] Result three: XYZ hits $50 in July of 2007 a) The put option expires worthless (OTM). b) The call option expires worthless (ATM). c) The trader loses nothing, since both options expire worthless and keeps his or her 100 shares. Advantage and Disadvantage of Implementing a Costless Collar (Zero-Cost Collar) Strategy: Pluses: The upside to this type of strategy is that the investor will always make a limited profit in a bull market. Another advantage in using the costless collar (zero-cost Collar) is that the trader fully protects their long positions at little to no cost, due to the offsetting premiums paid and received. Minuses: The downside in using a covered combination strategy is that the method limits an investor's profits. If the underlying asset's market value explodes, the trader would only receive what he or she gains from the call option.
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The backspread trade is used to take advantage of a substantial move in the price of a stock or ETF. This trade is composed of more long options than short options, with the strike prices selected so that the cost of the trade is small and even possibly provides a credit. In order for the backspread trade to be successful, the expiration date of the options must allow sufficient time for the expected price move in the underlying stock or ETF to occur. It is possible to use weekly options for the backspread provided that the price move occurs within the brief lifetime of the options. A possible application of a backspread with weekly options is in anticipation of a special announcement or report that might produce a substantial price move. On September 12, Apple, Inc (AAPL) is expected to announce the details of its new iPhone 5. A company that may benefit from this announcement is Qualcomm, Inc. This makes a weekly backspread trade on QCOM look particularly attractive, since QCOM options offer more leverage than the corresponding AAPL weekly options. Let's consider a possible backspread trade with QCOM call options that will expire on September 14. Trade: Buy 3 September 62.5 weekly calls (expiration 9/14) at $.75 per share and sell 1 September 60 weekly call (expiration 9/14) at $2.60 per share. Credit = $35 [(2.60 X 100) - (.75 X 300) = 35] Maximum risk = $215 If the price of QCOM reaches $64.25 before the weekly options expire on September 14, the backspread trade can be closed for a profit of $135. That represents a 63% return relative to the maximum risk on the trade. The maximum loss occurs if the price of QCOM closes at exactly $62.5 as the call options expire on 9/14. If QCOM happens to close below $60 on 9/14, then all of the options expire worthless and the original credit of $35 becomes a profit. Disclosure: Olmstead Options owns monthly options in QCOM that expire Sept. 21. Dr. Olmstead can be found at http://www.olmsteadoptions.com, an on-line options trading site, centered around options education material and option trading strategies he’s developed. He is Professor of Applied Mathematics at Northwestern University, author of the popular and highly-praised options book, Options for the Beginner and Beyond (2006) and former chief strategist for The Options Professor on-line newsletter, distributed by Zacks.com and Forbes.com.
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An Equity Linked Foreign Exchange Option – ELF-X is successful when the foreign exchange rate is favorable. The trading value is then determined by the performance of the equity.
