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Found 8 results

  1. The long jelly roll is an options trade that aims to profit from a time value spread through the sale and purchase of two call and two put options, each with different expiration dates.
  2. India will have its once in five year general elections at some point in the next 7 months. If the current government does not decide to call them earlier, they will have to be held in May 2014 as the term of the current government expires then. It is almost a given that IVs will rise from the current levels the moment the elections are announced. I'm looking for a way to benefit from this increase without taking any directional call on the markets. Although India does have its own VIX, there is no futures on the VIX. If there were futures, I would have bought the futures and rolled them over till the elections. Would like to know if there is a way to benefit from an expected increase in IVs in the absence of VIX futures. One has to keep in mind that the IVs could increase sharply at any point from now till May and be able to exit when that spike comes and of course, the fact that I'm looking for a non-directional strategy.
  3. The Iron Condor has two sides to it – the good and the ugly. It’s one of the most popular Options strategies out there, for good reasons. But when Iron Condors (or Credit spreads more generally) get into trouble, it’s not fun. You give up gains you made in 4 or 5 trades at one time.
  4. I would like to tell you about options. In my opinion, options are the most important financial instrument. Its really easy to make money using option strategies. Let's understand the terminologies related to option - There are two basic types of options, call options and put options. • Call option: It gives the holder the right but not the obligation to buy an asset by a certain date for a certain price. • Put option: It gives the holder the right but not the obligation to sell an asset by a certain date for a certain price. • Option price/premium: It is the price which the option buyer pays to the option seller. It is also referred to as the option premium. • Expiration date: The date specified in the options contract is known as the expiration date, the exercise date, the strike date or the maturity. • Strike price: The price specified in the options contract is known as the strike price or the exercise price. • American options: These can be exercised at any time up to the expiration date. • European options: These can be exercised only on the expiration date itself. European options are easier to analyze than American options and properties of an American option are frequently deduced from those of its European counterpart. • In-the-money option: An in-the-money (ITM) option would lead to a positive cash flow to the holder if it were exercised immediately. A call option on the index is said to be in-the-money when the current index stands at a level higher than the strike price (i.e. spot price > strike price). If the index is much higher than the strike price, the call is said to be deep ITM. In the case of a put, the put is ITM if the index is below the strike price. • At-the-money option: An at-the-money (ATM) option would lead to zero cash flow if it were exercised immediately. An option on the index is at-the-money when the cur- rent index equals the strike price (i.e. spot price = strike price). • Out-of-the-money option: An out-of-the-money (OTM) option would lead to a negative cash flow if it were exercised immediately. A call option on the index is out-of-the- money when the current index stands at a level which is less than the strike price (i.e. spot price < strike price). If the index is much lower than the strike price, the call is said to be deep OTM. In the case of a put, the put is OTM if the index is above the strike price. • Intrinsic value of an option: The option premium has two components - intrinsic value and time value. Intrinsic value of an option at a given time is the amount the holder of the option will get if he exercises the option at that time. The intrinsic value of a call is Max[0, (S — K)] which means that the intrinsic value of a call is the greater of 0 or (S— K). Similarly, the intrinsic value of a put is Max [0, K — S], i.e. the greater of 0 or (K — St). K is the strike price and St is the spot price. • Time value of an option: The time value of an option is the difference between its premium and its intrinsic value. Both calls and puts have time value. The longer the time to expiration, the greater is an option’s time value, all else equal. At expiration, an option should have no time value. Happy Learning
  5. Hello, This thread is created to discuss the option strategies to be adopted for the month of Feb, 2012. Kindly put your view so that we can have a fair idea of how the traders are expecting the S&P 500 to move in Feb and will frame strategies for Feb.
  6. Hi All, I am going to talk about what is covered call strategy and when to use the same. Covered Call is a strategy in which an investor sells a call option on a stock he owns. In this strategy, the investor generally sells an Out of the money call option (Strike price > Current market price). The call would not get exercised unless the stock price increases above the strike price. Till then the investor in the stock (call seller) can retain the premium with him. This becomes his income from the stock. This strategy is usually adopted by a stock owner who is Neutral to Moderately Bullish about the stock. Writing out-of-the-money covered calls is an excellent strategy to use if you are mildly bullish toward the underlying stock as it allows you to earn a premium which also acts as a cushion should the stock price go down. So if you are planning to hold on to the shares anyway and have a target selling price in mind that is not too far off, you should write a covered call. Happy Learning
  7. Hi All, What option strategy we should follow to gain for S&P 500 for the month of Jan ? Need suggestions
  8. 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.
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