# Trading Option Greeks Ebook – What 3 Important Clues the Options Trading Greeks “Delta” Tell You

September 3, 2010 by admin

Filed under Option Trading

Trading Option Greeks Ebook

The options “delta” is one of the important component of the options greeks. As you might have already known, the options greeks offer you clues to the likely behavior of an option’s price movement in relation to the corresponding price movement of the underlying share.

Besides the delta, the options greeks also include other components such as the theta, gamma, vega & rho etc. In a nutshell, an options delta is basically a measure of the change in the option price resulting from a change in the price of the underlying stock. The delta is usually expressed as a decimal value in the range of between 0. 00 to 1. 00. The other components of the options greeks are also represented in decimal value. In this article, we would explore the 3 critical information that the options delta could reveal to an options trader so that it would give him or her a clearer picture of the potential price movement of the options so as to help him or her make a better options trading decision.

The first information that an options delta could reveal is that it could tell the options trader the percentage chance of an option trade. This percentage chance refers to the percentage chance in which a particular option would end up in-the-money. By the way, when an option goes in-the-money, it would be said to have attained “intrinsic value” and thus would be worth some value to the options trader when he or she either sells the options position or exercise the option. Thus, an option with a delta value of 0. 80 would mean that it has a 80% chance of finishing in-the-money. Trading Option Greeks Ebook

The second information that the options delta provides is the percentage change that an option trader would expect of an option position. This means that the delta would determine the percentage change in the options price movement in relation to the corresponding change in the price of the underlying stock. For example, an option with a delta value of 0. 60 will move 60% of every one-point movement of the underlying stock. If the underlying stock moves $1. 00, then the option would move $0. 60. So if an option has a delta value of 0. 90, the option would move $0. 90 on every $1. 00 movement in the underlying stock; I guess you get the point.

The last important information that the options delta can provide is the hedge ratio, which is the amount of deltas needed to properly hedge a particular trading position. For example, an investor who wants to implement a delta-neutral strategy may buy up 100 shares of the underlying stock and hedge the position with 2 nos. of at-the-money put option which have a delta value of around 0. 50 each. Since the underlying stock has a delta of 1. 00 and the delta value of the 2 put options would add up to the delta value 1. 00 too, this would thus establish a delta-neutral trading position.

As mentioned earlier, the options delta is an important component of the the options greeks which could tell an options investor how to determine the likely price movement behavior of the options in relation to the corresponding price action of the underlying stock. The delta basically determines the percentage chance, the percentage change and the hedge ratio requirement of an option trading position. Thus, the options trader is advised to take a look at this important component of the options greeks the next time he or she make a options trading decision. Trading Option Greeks Ebook

# The Stealth Greek Of Options Trading: Vega

August 31, 2010 by admin

Filed under Option Trading

By: Chris Vermeulen & J. W. Jones

In my previous missives on the Greeks of the option world, we have spent most of our time focusing on Theta and Delta. In the real world of option trading, option prices are the subjects of three primal forces: price of the underlying, time to expiration, and implied volatility. Delta and theta address the first of these two primal forces. The third primal force, implied volatility, is by far the least known by newcomers to the option trading world. However, while it is usually not respected or even known by many new to trading options, it typically is the most frequently unrecognized force resulting in is the cause for significant trading capital deterioration.

In order to set the framework within which to understand option pricing, it is essential to understand that the quoted price of each option is in reality the sum of the intrinsic value (if any) and the extrinsic (time) value. The intrinsic value has been discussed previously and consists of the portion of the premium which reflects the extent to which the particular option is “in the money. ”

Understanding of the various concepts of volatility is essential to grasping one of the essential defining operational characteristics of the world of options. Volatility can be considered in light of:

1. What was (SV, statistical volatility; HV historical volatility; & other synonyms of the same)

2. What is,

3. What shall be (IV, implied volatility, and Market Implied Volatility (MIV) They are all confusingly disparate words and acronyms signifying identical concepts)

Of these three time frames within which volatility can be considered, implied volatility is by far the most important. The nexus point is right here, right now, while the future is unclear and will always be that way. For an option trader to sustain profitability over long periods of time, it is essential to understand implied volatility and its various implications.

Let us consider for a moment the variables defining an option’s price. Intrinsic value is a crisply defined value that requires simply the calculation of the relationship of the price of the underlying to the strike price of the option and can theoretically vary from 0 to infinity. The time value (also termed the extrinsic value) of the option is dependent, in large part, on two distinct variables. These variables are the amount of time to expiration and implied volatility. Time to expiration is easily defined by anyone with access to a calendar and schedule of option expiration dates. Option expiration is easily accessible for option traders, and as such represents a totally transparent variable. Conversely, implied volatility is not as easy to explain, or quantify.

The subjective concept expressed by implied volatility is to be distinguished from the mathematically objective and precise concept of historic volatility. Historical volatility is simply derived from the price action of the underlying and can be calculated in one or more of several iterations. Each calculation is fundamentally derived from historically apparent price action.

Implied volatility is not only arduous to understand, it is even more difficult to quantify. A totally different calculation is required; the computation is reflective of a unique and characteristic point of view with regard to price action. It is technically calculated by an iterative process requiring multiple trial and error calculations; thankfully the robust computational ability of the current generation of computers handles this task easily. Of the three primal forces impacting option price, implied volatility is the only factor subject to cerebration. As an adaptable and subjective input factor, implied volatility is reflective of both general market sentiment and the subjective evaluation of potential future volatility while simultaneously corresponding with the specific direction of the underlying. As such, it is a forward looking evaluation as opposed to historic volatility which is well, historic.

Implied volatility has a historic and characteristic range for each underlying. A strong historic tendency is the characteristic for implied volatility to revert to the mean for the particular underlying under consideration. This strong mean reverting tendency forms one of the primary fundamental tenets of option trading and represents a major opportunity for potential profit in option trading.

TheOptionsGuide site produced the chart below that illustrates the behavior of Vega at various strike prices that are expiring in 3 months, 6 months and 9 months when the stock is currently trading at $50.

In addition to the historic backdrop in which implied volatility may be considered, there are certain stereotypic patterns of IV expansion and contraction in relation to anticipated events which may lead to unusual volatility of the underlying. Classic examples of these events include earnings, impending FDA announcements, and the release of key economic data by the government or the analyst community. For example, many of the most extreme increases in implied volatility anticipate FDA decisions and routinely revert to the mean immediately following the anticipated announcement. Potentially substantial profit opportunities are borne from such situations for the adept and knowledgeable option trader.

In future writings we will address the precise mechanisms by which perturbations in implied volatility can be exploited for profit by the knowledgeable option trader. Failure to consider the current position of implied volatility in a historic framework for the particular underlying in which you are contemplating a trade is the single most frequent hallmark of an inexperienced trader. Lack of attention to this important factor in trade planning is the most frequent cause of paradoxical option behavior and failure to profit from correctly predicting anticipated price movements of the underlying.

While most equity traders focus their attention on the SP-500 for broad market clues, option traders always have a watchful eye on the volatility index, commonly known as the VIX. While the VIX is the most common volatility measurement in the option trading world, there are several volatility indices which can be monitored, followed, and even traded if one is so inclined. While it is not always necessarily the case, recently when the VIX rises, the broad markets are selling off.

While this article has been a basic overview of implied volatility and Vega, it will conclude the series of recent articles which have been focused on the option Greeks. Forthcoming articles are going to be more focused on trades and the unbelievable profit opportunities that can be created by various option strategies. In closing, if you are interested in furthering your education regarding options my recommendation is to do some serious homework. Otherwise it will only be a matter of time before a combination of Theta, Delta, Vega, or implied volatility rear their ugly heads and take money from unsuspecting rookies.

If you would like to receive our free options trading reports and trading signals please join our free newsletter at: www. OptionsTradingSignals. com

J. W. Jones is an independent options trader using multiple forms of analysis to guide his option trading strategies. Jones has an extensive background in portfolio analysis and analytics as well as risk analysis. J. W. strives to reach traders that are missing opportunities trading options and commits to writing content which is not only educational, but entertaining as well. Regular readers will develop the knowledge and skills to trade options competently over time. Jones focuses on writing spreads in situations where risk is clearly defined and high potential returns can be realized.

# Options Trading: Intrinsic Value and the Vertical Spread

August 17, 2010 by admin

Filed under Option Trading

An investor should always bear in mind that vertical spreads have an intrinsic value. This means that you can consider the money. “If a vertical extension has an intrinsic value, can also have an extrinsic value. Unlike the maximum values of equal intrinsic difference between attacks on maturity, maximum extrinsic value deviates from the propagation of spreading based on several factors . During the life of a vertical spread, the price will fluctuate between zero and the value of the difference between the two strikes. An investor can determine the price of the spread, at a given time, the locations of people and time to maturity. At maturity, what remains for both options is the intrinsic value of each. Therefore, the value of the spread is the difference between the intrinsic value of each option at maturity. Because vertical spreads have an intrinsic value, moneyness the term applies to them. Moneyness refers to whether or not and to what extent an option, or a vertical extension may be in the money or out of money. This is a term used mainly by floor traders, but it’s still worth noting here. Call vertical spread and Value Vertical Put Spread Spread with intrinsic value are considered in the money. How can you identify the value of a vertical call spread or a vertical put spread? Compare the price of the shares at exercise prices. Look at the vertical call spread. If the stock price is above the lower strike of the spread, the spread is money. In February 1950 the spread-55-call, if the stock is trading at $ 52. 00, then the spread would be in the money by $ 2. This is because if the spread expired today, ending on February 50 calls $ 2. 00 on the money. February 55 calls expiring worthless because they are out of money. The spread, however, the money would be worth $ 2. 00. The rule is similar to determine whether the difference is with money. If the stock price is less than the lowest strike spread, the spread is out of money. Again, looking at the spread 50-55 febrero calls, if the spread expired today and the stock price closed at $ 48. 00, (less than the lower strike) then the spread would be out of money, so the spread will be out of money. If the stock is trading at the same price as the lower strike price, the spread is considered in the money. That vertical spreads, a spread is determined in the money if the stock price is less than the greater of the two strikes of the spread. For example, look at the spread in September 1940 to 45. If the stock closes at $ 42. 00 the due date, February 45 finish on the money raised and the value of $ 3. 00. February 40 is taken out of money by creating a $ 3. 00 intrinsic value for propagation. Since the spread has an intrinsic value, is money. Vertical divergence is taken out of money if the stock price is higher than the highest strike spread. So, back to our September 40-45 spread example, if the material was to close at a price of $ 46. 00 (higher than the highest strike) both in September 1940 and 45 put will expire worthless. Thus, the spread will have no value and money. Vertical divergence is considered to-the-money when the stock price equals the exercise price higher.