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Postby PebbleTrader » Sat Feb 23, 2013 6:02 pm

Ok, for Delta, anybody who has ever taken math knows that the "triangle" "Delta" symbol means "Change"...So "Change" as in by the amount that the price of an option "Changes".
Last edited by PebbleTrader on Sat Feb 23, 2013 6:16 pm, edited 1 time in total.
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Postby PebbleTrader » Sat Feb 23, 2013 6:14 pm

Alright, here is how I'm remembering Gamma:

Human beings are "Sensitive" to "Gamma Rays" (like X-rays, radiation, etc.), "Sensitive" as in the Gamma shows the option delta's "Sensitivity" to market price changes.
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Postby PebbleTrader » Sat Feb 23, 2013 6:17 pm

Super simple concepts, super easy to remember!
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Postby aliassmith » Sun Feb 24, 2013 2:23 am

Dillinger wrote: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"


I believe she is selling an OTM call and selling an OTM put (short strangle) with a wide seperation in strike price.
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Postby PebbleTrader » Tue Feb 26, 2013 9:59 pm

Here are some basic definitions:

Strike Price- The pre-agreed price per share at which stock may be bought or sold under the terms of an option contract. Some people refer to the strike price as the "exercise price".

In-The-Money (ITM)- For call options, this means the stock price is above the strike price. So if a call has a strike price of $50 and the stock is trading at $55, that option is in-the-money.

For put options, it means the stock price is below the strike price. So if a put has a strike price of $50 and the stock is trading at $45, that option is in-the-money.

Out-of-The-Money (OTM)- For call options, this means the stock price is below the strike price. For put options, this means the stock price is above the strike price. The price of out-of-the-money options consists entirely of "time value."

At-The-Money (ATM)- An option is "at-the-money" when the stock price is equal to the strike price. (Since the two values are rarely exactly equal, when purchasing options the strike price closest to the stock price is typically called the "ATM strike.")

Intrinsic Value- The amount an option is in-the-money. Obviously, only in-the-money options have intrinsic value.

Time Value- The part of an option price that is based on its time to expiration. If you subtract the amount of intrinsic value from an option price, you're left with the time value. If an option has no intrinsic value (i.e., it's out-of-the-money) its entire worth is based on time value.

Premium- The total price of an option contract is made up of the sum of the intrinsic value and the time value premium. Even though most people refer to the price of an option contract as the "Premium", it is actually an inaccurate expression. The Premium of an option contract is the part of the price that is not intrinsic.

Exercise- This occurs when the owner of an option invokes the right embedded in the option contract. In layman's terms, it means the option owner buys or sells the underlying stock at the strike price, and requires the option seller to take the other side of the trade.

Assignment- When an option owner exercises the option, an option seller (or "writer") is assigned and must make good on his or her obligation. That means he or she is required to buy or sell the underlying stock at the strike price.
Last edited by PebbleTrader on Wed Feb 27, 2013 12:31 pm, edited 1 time in total.
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Postby PebbleTrader » Tue Feb 26, 2013 10:02 pm

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Postby PebbleTrader » Tue Feb 26, 2013 10:37 pm

A Different Way To Think About Delta

So far we've given you the textbook definition of delta. But here's
another useful way to think about delta: the probability an option will wind
up at least $.01 in-the-money at expiration.


Technically, this is not a valid definition because the actual math behind
delta is not an advanced probability calculation. However, delta is
frequently used synonymously with probability in the options world.

In casual conversation, it is customary to drop the decimal point in the
delta figure, as in, "My option has a 60 delta." Or, "There is a 99 delta I am
going to have a beer when I finish writing this page."

Usually, an at-the-money call option will have a delta of about .50, or "50
delta." That's because there should be a 50/50 chance the option winds up
in- or out-of-the-money at expiration. Now let's look at how delta begins to
change as an option gets further in- or out-of-the-money.

How Price Movement Affects Delta

As an option gets further in-the-money, the probability it will be in-the-
money at expiration increases as well
. So the option's delta will
increase. As an option gets further out-of-the-money, the probability it will
be in-the-money at expiration decreases. So the option's delta will
decrease.

Imagine you own a call option on stock XYZ with a strike price of $50, and
60 days prior to expiration the stock price is exactly $50. Since it's an at-
the-money option, the delta should be about .50. For sake of example, let's
say the option is worth $2. So in theory, if the stock goes up to $51, the
option price should go up from $2 to $2.50.

What, then, if the stock continues to go up from $51 to $52? There is now a
higher probability that the option will end up in-the-money at expiration. So
what will happen to delta? If you said, "Delta will increase," you're
absolutely correct.

If the stock price goes up from $51 to $52, the option price might go up
from $2.50 to $3.10. That's a $.60 move for a $1 movement in the stock.
So delta has increased from .50 to .60 ($3.10 - $2.50 = $.60) as the stock
got further in-the-money.

On the other hand, what if the stock drops from $50 to $49? The option
price might go down from $2 to $1.50, again reflecting the .50 delta of at-
the-money options ($2 - $1.50 = $.50). But if the stock keeps going down
to $48, the option might go down from $1.50 to $1.10. So delta in this case
would have gone down to .40 ($1.50 - $1.10 = $.40). This decrease in
delta reflects the lower probability the option will end up in-the-money at
expiration.

How Delta Changes As Expiration Approaches

Like stock price, time until expiration will affect the probability that options
will finish in- or out-of-the-money. That's because as expiration
approaches, the stock will have less time to move above or below the
strike price for your option.


Because probabilities are changing as expiration approaches, delta will
react differently to changes in the stock price. If calls are in-the-money
just prior to expiration, the delta will approach 1 and the option will move
penny-for-penny with the stock. In-the-money puts will approach -1 as
expiration nears.

If options are out-of-the-money, they will approach 0 more rapidly than
they would further out in time and stop reacting altogether to movement in
the stock.

Imagine stock XYZ is at $50, with your $50 strike call option only one day
from expiration. Again, the delta should be about .50, since there's
theoretically a 50/50 chance of the stock moving in either direction. But
what will happen if the stock goes up to $51?

Think about it. If there's only one day until expiration and the option is one
point in-the-money, what's the probability the option will still be at least
$.01 in-the-money by tomorrow? It's pretty high, right?

Of course it is. So delta will increase accordingly, making a dramatic move
from .50 to about .90. Conversely, if stock XYZ drops from $50 to $49 just
one day before the option expires, the delta might change from .50 to .10,
reflecting the much lower probability that the option will finish in-the-
money.

So as expiration approaches, changes in the stock value will cause
more dramatic changes in delta
, due to increased or decreased
probability of finishing in-the-money.

Don't forget: the "textbook definition" of delta has nothing to do with the
probability of options finishing in- or out-of-the-money. Again, delta is
simply the amount an option price will move based on a $1 change in the
underlying stock.

But looking at delta as the probability an option will finish in-the-money is a
pretty nifty way to think about it.
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Postby PebbleTrader » Wed Feb 27, 2013 12:01 am

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Time decay, or theta, is enemy number one for the option buyer. On the
other hand, it's usually the option seller's best friend. Theta is the amount
the price of calls and puts will decrease (at least in theory) for a one-day
change in the time to expiration.

This graph shows how an at-the-money option's value will decay over the
last three months until expiration. Notice how time value melts away at an
accelerated rate as expiration approaches.

In the options market, the passage of time is similar to the effect of the hot
summer sun on a block of ice. Each moment that passes causes some of
the option's time value to "melt away." Furthermore, not only does the time
value melt away, it does so at an accelerated rate as expiration
approaches.

Check out figure 2. As you can see, an at-the-money 90-day option with a
premium of $1.70 will lose $.30 of its value in one month. A 60-day option,
on the other hand, might lose $.40 of its value over the course of the
following month. And the 30-day option will lose the entire remaining $1 of
time value by expiration.

At-the-money options will experience more significant dollar losses over
time than in- or out-of-the-money options with the same underlying stock
and expiration date. That's because at-the-money options have the most
time value built into the premium. And the bigger the chunk of time value
built into the price, the more there is to lose.

Keep in mind that for out-of-the-money options, theta will be lower than it
is for at-the-money options. That's because the dollar amount of time value
is smaller. However, the loss may be greater percentage-wise for out-of-
the-money options because of the smaller time value.
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Postby PebbleTrader » Wed Feb 27, 2013 12:08 am

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Gamma is the rate that delta will change based on a $1 change in the stock
price. So if delta is the "speed" at which option prices change, you can
think of gamma as the "acceleration." Options with the highest gamma are
the most responsive to changes in the price of the underlying stock.

As we've mentioned, delta is a dynamic number that changes as the stock
price changes. But delta doesn't change at the same rate for every option
based on a given stock. Let's take another look at our call option on stock
XYZ, with a strike price of $50, to see how gamma reflects the change in
delta with respect to changes in stock price and time until expiration
(Figure 1).

Note how delta and gamma change as the stock price moves up or down
from $50 and the option moves in- or out-of-the-money. As you can see,
the price of at-the-money options will change more significantly than the
price of in- or out-of-the-money options with the same expiration. Also, the
price of near-term at-the-money options will change more significantly than
the price of longer-term at-the-money options.

So what this talk about gamma boils down to is that the price of near-term
at-the-money options will exhibit the most explosive response to price
changes in the stock.

If you're an option buyer, high gamma is good as long as your forecast is
correct. That's because as your option moves in-the-money, delta will
approach 1 more rapidly. But if your forecast is wrong, it can come back to
bite you by rapidly lowering your delta.

If you're an option seller and your forecast is incorrect, high gamma is the
enemy. That's because it can cause your position to work against you at a
more accelerated rate if the option you've sold moves in-the-money. But if
your forecast is correct, high gamma is your friend since the value of the
option you sold will lose value more rapidly.
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Postby PebbleTrader » Wed Feb 27, 2013 12:12 am

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Vega is the amount call and put prices will change, in theory, for a
corresponding one-point change in implied volatility. Vega does not have
any effect on the intrinsic value of options; it only affects the "time value"
of an option's price.

Typically, as implied volatility increases, the value of options will increase.
That's because an increase in implied volatility suggests an increased
range of potential movement for the stock.

Let's examine a 30-day option on stock XYZ with a $50 strike price and the
stock exactly at $50. Vega for this option might be .03. In other words, the
value of the option might go up $.03 if implied volatility increases one
point, and the value of the option might go down $.03 if implied volatility
decreases one point.

Now, if you look at a 365-day at-the-money XYZ option, vega might be as
high as .20. So the value of the option might change $.20 when implied
volatility changes by a point (see figure 3).
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