I have a question:
When I am selling options (call or put) does it require me to own the actual equities first? Whereas when buying options (call or put) I don't have to own the actual equities?
No lack of OPTIONS
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PebbleTrader wrote:I have a question:
When I am selling options (call or put) does it require me to own the actual equities first? Whereas when buying options (call or put) I don't have to own the actual equities?
You dont have to own the underlying to sell options. Some people actually sell puts to aquire assets at lower prices and collect a premium.
xyz is priced at $50 and I don't want it at that price.
I wouldn't mind owning it at $45 so I sell puts at the $45
strike price. If the price goes down to $45 or less I get the
stock put on me. If it doesn't go
down to $45 I keep the premium. http://www.theoptionsguide.com/writing ... tocks.aspx
Trade Your Way as Long as It Makes Money!
Selling credit spreads on weekly options is a pretty easy way to grab a
few percent a week and build some space. Weekly options lose value very
fast due to time decay. So early in the week sell the spread outside of the
historic weekly range then just kick back and watch it rapidly lose value.
The best part is even if the market makes a large move against you over
the week and your position is in danger, by thursday or friday they have
lost so much value from time decay you can roll your position back or
close it for a small loss or even a profit still.
http://www.youtube.com/watch?v=rIE2GAqnFGw
The down side to this is you have to put up a large part of your account to
make a decent return at these safer levels and if there was a "flash crash"
type of event where you didnt have time to manage the trade you could
lose a large portion of your account.
I have been building space since the start of the year doing this and it is
time to start buying some puts/calls and aggresively pushing with house
money.
I think the lady in the video is doing something similar on the indices.
selling credit spreads at level so far away there is only a 5% chance of
price getting there. That is why they keep talking about how high her risk
is. You have to risk pretty much your whole account on each trade to
achieve high returns at "safe distances"
few percent a week and build some space. Weekly options lose value very
fast due to time decay. So early in the week sell the spread outside of the
historic weekly range then just kick back and watch it rapidly lose value.
The best part is even if the market makes a large move against you over
the week and your position is in danger, by thursday or friday they have
lost so much value from time decay you can roll your position back or
close it for a small loss or even a profit still.
http://www.youtube.com/watch?v=rIE2GAqnFGw
The down side to this is you have to put up a large part of your account to
make a decent return at these safer levels and if there was a "flash crash"
type of event where you didnt have time to manage the trade you could
lose a large portion of your account.
I have been building space since the start of the year doing this and it is
time to start buying some puts/calls and aggresively pushing with house
money.
I think the lady in the video is doing something similar on the indices.
selling credit spreads at level so far away there is only a 5% chance of
price getting there. That is why they keep talking about how high her risk
is. You have to risk pretty much your whole account on each trade to
achieve high returns at "safe distances"
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 PebbleTrader
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Delta
The most basic and useful of the Greeks is the delta. Even with a simple
working knowledge of the delta, you are immediately going to be a better
options trader.
Delta: The amount that the price of an option changes as compared to
a $1 increase in the stock price. This quantity is typically expressed as
either a decimal or a percentage.
The most basic and useful of the Greeks is the delta. Even with a simple
working knowledge of the delta, you are immediately going to be a better
options trader.
Delta: The amount that the price of an option changes as compared to
a $1 increase in the stock price. This quantity is typically expressed as
either a decimal or a percentage.
Last edited by PebbleTrader on Sat Feb 23, 2013 4:51 pm, edited 2 times in total.
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 PebbleTrader
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Computing the Delta of a Call Option
Let's illustrate with some examples:
 Example 1. XYZ is at $30 per share. The Mar 30 call, which
expires in three weeks, is priced at $2 per share. Suppose the
price of XYZ increases by $2 up to $32 per share. Typically, this
will cause the price of the Mar 30 call to increase by $1 up to
$3 per share.
Let's compute the delta for this Mar 30 call: Its price increased
by $1 when the stock price increased by $2. Thus, the delta is
given by the fraction 1/2 = .50, or 50 percent. So, a delta of
.50 indicates that the price of the option increases by 50 percent
the amount of the increase in the price of the stock.
This example illustrates an important basic property that
holds for most options, namely, an atthemoney call (that is,
strike price nearly the same as the stock price) typically has a
delta of about .50.
 Example 2. XYZ is at $30 per share. The Mar 25 call, which
expires in three weeks, is priced at $6 per share. Suppose the
price of XYZ increases by $2 up to $32 per share. This might
cause the price of the Mar 25 call to increase by $1.60 up to
$7.60 per share.
Let's compute the delta for this Mar 25 call: Its price increased
by $1.60 when the stock priced increased by $2. Thus the delta
is given by the fraction 1.6/2 = .80, or 80 percent.
This example illustrates another basic property of options,
namely, an inthemoney call (that is, strike price well below the
stock price) will have a delta greater than .50 but less than 1.0.
The deeperinthemoney, the closer the delta will be to 1.0.
 Example 3. XYZ is at $30 per share. The Mar 35 call, which
expires in three weeks, is priced at $.60 per share. Suppose the
price of XYZ increases by $2 up to $32 per share. This might
cause the price of the Mar 35 call to increase by $.20 up to
$.80 per share.
Let's compute the delta for this Mar 35 call: Its price increased
by $.20 when the stock price increased by $2. Thus the delta is
given by the fraction 0.2/2 = .10, or 10 percent.
This example illustrates yet another basic property of options,
namely an outofthemoney call (that is, strike price well
above the stock price) will have a delta less than .50. The further
outof themoney, the smaller will be the delta.
The delta values described in the preceding examples are typical for
options that are not too close to expiration. Nearexpiration, all inthe
money options will have a delta close to one, and all outofthemoney
will have a delta close to zero.
Let's illustrate with some examples:
 Example 1. XYZ is at $30 per share. The Mar 30 call, which
expires in three weeks, is priced at $2 per share. Suppose the
price of XYZ increases by $2 up to $32 per share. Typically, this
will cause the price of the Mar 30 call to increase by $1 up to
$3 per share.
Let's compute the delta for this Mar 30 call: Its price increased
by $1 when the stock price increased by $2. Thus, the delta is
given by the fraction 1/2 = .50, or 50 percent. So, a delta of
.50 indicates that the price of the option increases by 50 percent
the amount of the increase in the price of the stock.
This example illustrates an important basic property that
holds for most options, namely, an atthemoney call (that is,
strike price nearly the same as the stock price) typically has a
delta of about .50.
 Example 2. XYZ is at $30 per share. The Mar 25 call, which
expires in three weeks, is priced at $6 per share. Suppose the
price of XYZ increases by $2 up to $32 per share. This might
cause the price of the Mar 25 call to increase by $1.60 up to
$7.60 per share.
Let's compute the delta for this Mar 25 call: Its price increased
by $1.60 when the stock priced increased by $2. Thus the delta
is given by the fraction 1.6/2 = .80, or 80 percent.
This example illustrates another basic property of options,
namely, an inthemoney call (that is, strike price well below the
stock price) will have a delta greater than .50 but less than 1.0.
The deeperinthemoney, the closer the delta will be to 1.0.
 Example 3. XYZ is at $30 per share. The Mar 35 call, which
expires in three weeks, is priced at $.60 per share. Suppose the
price of XYZ increases by $2 up to $32 per share. This might
cause the price of the Mar 35 call to increase by $.20 up to
$.80 per share.
Let's compute the delta for this Mar 35 call: Its price increased
by $.20 when the stock price increased by $2. Thus the delta is
given by the fraction 0.2/2 = .10, or 10 percent.
This example illustrates yet another basic property of options,
namely an outofthemoney call (that is, strike price well
above the stock price) will have a delta less than .50. The further
outof themoney, the smaller will be the delta.
The delta values described in the preceding examples are typical for
options that are not too close to expiration. Nearexpiration, all inthe
money options will have a delta close to one, and all outofthemoney
will have a delta close to zero.
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 PebbleTrader
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Application of the Delta
Now let's see how our experience with these three examples can help us
with our options trading. You believe that the stock price of XYZ is
going to increase in the near future and you want to play this move with
options.What are you choices?
Buy an inthemoney call: If you want to capture an almost dollarfordollar
increase in the price of the stock, you need to purchase an
option with a high delta. This means selecting a deepinthemoney
call. If the option has a delta of .80, it will increase $.80 in price for
every $1 increase in the price of XYZ. The deepinthemoney call will
be relatively expensive, but it will capture more of the price move in
the stock.
Buy an atthemoney or outofthemoney call: If you can count on
a significant move in the stock within a short period of time, an atthe
money or outofthe money call can yield a higher percentage
increase in the price of the call. If the option has a delta of .50, a
$2 increase in the price of XYZ will produce a $1 increase in the price
of the option. If the option has delta of .20, a $2 increase the stock
price will produce a $.40 increase in the price of the option. Because
an atthemoney call will be relatively cheap and an outofthemoney
call will be even cheaper, these options offer more leverage for
a profit.
At first glance, it might seem that you would always choose the at
themoney or outofthe money call, because of the higher leverage.
The real issue is whether the stock price will rise high enough and
quickly enough for the extra leverage to yield a better profit. Suppose
the trades in the above Examples 1, 2, and 3 were initiated when the
March options were only three weeks from expiration. Also, suppose
that XYZ waits until one week before expiration to make the $2 rise
from $30 to $32. Let's follow up to see what might happen in the above
examples.
 Example 1 followup. All the value of the Mar 30 call was
time value.With only one week to go until expiration, its price
could have fallen to $1, whereas its delta might still be .50.
Then, the $2 move in XYZ would yield a $1 increase in the
price of the option, bringing its value back to $2 per share for
breakeven.
 Example 2 followup. The Mar 25 call had only $1 of time
value (25 + 6  30 = 1), so its price might have fallen to $5.40,
with its delta remaining at .80. Then, the $2 move in XYZ
would yield a $1.60 increase in the price of the option, bringing
its value to $7 per share, for a net profit of $1 per share.
 Example 3 followup. All of the value of the Mar 35 call
was time value. Being so far outofthe money with only a
week until expiration, its price might have dropped to $.15 a
share with its delta remaining at .10. Then, the $2 move in
XYZ would yield a $.20 increase in the price of the option,
bringing its value to $.35 per share, for a net loss of $.25 per
share.
Now let's see how our experience with these three examples can help us
with our options trading. You believe that the stock price of XYZ is
going to increase in the near future and you want to play this move with
options.What are you choices?
Buy an inthemoney call: If you want to capture an almost dollarfordollar
increase in the price of the stock, you need to purchase an
option with a high delta. This means selecting a deepinthemoney
call. If the option has a delta of .80, it will increase $.80 in price for
every $1 increase in the price of XYZ. The deepinthemoney call will
be relatively expensive, but it will capture more of the price move in
the stock.
Buy an atthemoney or outofthemoney call: If you can count on
a significant move in the stock within a short period of time, an atthe
money or outofthe money call can yield a higher percentage
increase in the price of the call. If the option has a delta of .50, a
$2 increase in the price of XYZ will produce a $1 increase in the price
of the option. If the option has delta of .20, a $2 increase the stock
price will produce a $.40 increase in the price of the option. Because
an atthemoney call will be relatively cheap and an outofthemoney
call will be even cheaper, these options offer more leverage for
a profit.
At first glance, it might seem that you would always choose the at
themoney or outofthe money call, because of the higher leverage.
The real issue is whether the stock price will rise high enough and
quickly enough for the extra leverage to yield a better profit. Suppose
the trades in the above Examples 1, 2, and 3 were initiated when the
March options were only three weeks from expiration. Also, suppose
that XYZ waits until one week before expiration to make the $2 rise
from $30 to $32. Let's follow up to see what might happen in the above
examples.
 Example 1 followup. All the value of the Mar 30 call was
time value.With only one week to go until expiration, its price
could have fallen to $1, whereas its delta might still be .50.
Then, the $2 move in XYZ would yield a $1 increase in the
price of the option, bringing its value back to $2 per share for
breakeven.
 Example 2 followup. The Mar 25 call had only $1 of time
value (25 + 6  30 = 1), so its price might have fallen to $5.40,
with its delta remaining at .80. Then, the $2 move in XYZ
would yield a $1.60 increase in the price of the option, bringing
its value to $7 per share, for a net profit of $1 per share.
 Example 3 followup. All of the value of the Mar 35 call
was time value. Being so far outofthe money with only a
week until expiration, its price might have dropped to $.15 a
share with its delta remaining at .10. Then, the $2 move in
XYZ would yield a $.20 increase in the price of the option,
bringing its value to $.35 per share, for a net loss of $.25 per
share.
Last edited by PebbleTrader on Sat Feb 23, 2013 4:21 pm, edited 1 time in total.
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 PebbleTrader
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What has been learned about the delta in these examples?
When considering an option to buy, make a mental estimate of the
delta for that option. You do not necessarily need a precise value.
Decide on a realistic increase in the price of the stock you are following.
To estimate the new option price, first multiply the change in the stock
price by the (approximate) delta of the option to see how much the
value of the option would increase. Add that increase to the purchase
price of the option, while allowing for some loss of time value in the
option. If this estimate of the new price of the option represents an
acceptable profit, you have a good reason to buy the option.
The delta of an option is not fixed.When the price of the stock moves
significantly, the delta of an option will change. In Example 1, if XYZ
moves up to $35, the Mar 30 call is no longer an atthemoney option.
It has become an inthemoney option, and its delta will then be
considerably larger. This works in your favor, because as the stock price
rises to higher levels, the option price responds with a greater percentage
of the stock gain.
Computing the Delta of a Put Option
The distinction between the delta for a call and the delta for a put
is that the delta of a long put is always negative. This is because
an increase in the stock price results in a decrease in the price of a
put. Analogous to a call option, an atthemoney put generally has a
delta of about .50. An inthemoney put will have a delta between
.50 and 1.0. An outofthemoney put will have a delta between .5
and 0.
When considering an option to buy, make a mental estimate of the
delta for that option. You do not necessarily need a precise value.
Decide on a realistic increase in the price of the stock you are following.
To estimate the new option price, first multiply the change in the stock
price by the (approximate) delta of the option to see how much the
value of the option would increase. Add that increase to the purchase
price of the option, while allowing for some loss of time value in the
option. If this estimate of the new price of the option represents an
acceptable profit, you have a good reason to buy the option.
The delta of an option is not fixed.When the price of the stock moves
significantly, the delta of an option will change. In Example 1, if XYZ
moves up to $35, the Mar 30 call is no longer an atthemoney option.
It has become an inthemoney option, and its delta will then be
considerably larger. This works in your favor, because as the stock price
rises to higher levels, the option price responds with a greater percentage
of the stock gain.
Computing the Delta of a Put Option
The distinction between the delta for a call and the delta for a put
is that the delta of a long put is always negative. This is because
an increase in the stock price results in a decrease in the price of a
put. Analogous to a call option, an atthemoney put generally has a
delta of about .50. An inthemoney put will have a delta between
.50 and 1.0. An outofthemoney put will have a delta between .5
and 0.
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