Tuesday, September 25, 2012 12:14:54 AM
Option Pricing
You can look on the 1option.com site...for better answer...not an easy process of understanding options and pricing and all the mixed terminology that goes with them...and then there's them "greeks"...and implied volatility...to make you even more crazy...If you want the leverage you get with options without understanding pricing you're likely speculating/gambling...best be short term and if it don't make sense...step aside close the gamble until it does make sense.
high implied volatility
http://www.1option.com/index.php?/ask_me/comments/how_should_i_approach_high_implied_volatility_stock_options/
Every month we can always find options with very high implied volatility, especially from pharmacuetical companies that are waiting for FDA approval. Is there any proven way to profit from this situation regardless of the decision of FDA? (please, don't recommend a straddle)
Option Trading Answer
Anytime you see a spike in implied volatility it tells you that uncertainty has entered the picture. The professionals that make markets in that underlying attach a probability to the various outcomes and they calculate the impact on the profitability of the company. Then they price the options using complex proprietary algorithms. They have a staff of analysts running through the numbers and making phone calls within their network to try and find a shred of information that will give them an edge. I’m sure in some cases they have an employee in the courtroom waiting for the verdict to be read. In the end, I can’t compete in this arena. These large institutions have millions to throw at the event, I do not.
I run from these situations and I view them as a crapshoot. If you see a steady climb in IV and the stock has not moved, it means there is news pending.
Look for situations where the outcome is predictable - like a stock with a nice tight trading pattern and consistent earnings. Form an opinion, take a stand and know when to admit you are right or wrong (target, stop).
An answer to a early question, some stocks just do not have the correct delta to trade options, might be a great stock, but lousy options trader,,
Option Price Behavior
Why didn't my option move as much as the underlying stock?
Options will not move as much as their underlying stock unless they are in-the-money and/or very close to expiration. There are valid mathematical reasons for this. The amount an option can be expected to move (all other conditions being equal) given a 1-point move in the underlying stock is called delta. Delta is derived from the Black-Scholes formula for pricing options and represents roughly how much the option behaves like the underlying stock. A delta of .50, for example, means that an option can be expected (all other things being equal) to move about fifty cents for every $1 move in the underlying stock. Delta will change with time to expiration as the option moves more in- or out-of-the-money, and will also be affected by the volatility of the underlying stock.
Implied Volatility: Buy Low And Sell High
http://www.investopedia.com/articles/optioninvestor/08/implied-volatility.asp#axzz27LrTqMT9
Standard Deviation (Volatility)
http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:standard_deviation
Options Gamma - Definition
Options Gamma is the rate of change of options delta with a small rise in the price of the underlying stock.
Options Gamma - Introduction
Just as options delta measures how much the value of an option changes with a change in the price of the underlying stock, Options Gamma describes how much the options delta changes as the price of the underlying stock changes. Of the 5 options greeks, Delta and Gamma are the only ones that are related to each other and that Options Gamma is the only options greek that describes the change of another greek. That makes understanding options delta and Options Gamma extremely important to all options trading beginners.
Why Is Options Gamma Important?
Options Gamma is important because it affects the single options greek that determines the value of stock options most and that is the options delta. There is no question that options delta changes as it starts off at 0.5 when it is At The Money and then gradually move towards 1 as the options go deeper In The Money or gradually towards 0 as the options go farther Out Of The Money. The real question is, by what magnitude would the options delta change? Options Gamma measures that magnitude as well as the direction of change.
So, why is understanding the magnitude and direction of the change of options delta represented by its Gamma important?
Understanding Options Gamma is important for both directional and hedging trades. In directional trades, one would want an overall position Gamma to lean towards the direction of interest so that options delta expands as the trade develops. In hedging trades, one would want as low an overall options gamma as possible so that the options trading position remains as neutral to changes in the underlying stock as possible. Such hedging method has come to be known as Gamma Neutral Hedging.
Of course, if you are only buying call options or put options for a single directional trade, Options Gamma really have little to do with you because you can be sure that you are already buying positive Options Gamma which will increase the delta of your options as the stock rises or falls accordingly. Positive Options Gamma ensures that the delta of your options increases as it goes more and more in the money, increasing your profitability.
As such, Options Gamma is important to understand for options traders starting complex options strategies for the first time and for options traders who manage many complex options positions within a single portfolio like Market Makers do.
Options Delta - Definition
Options Delta measures the sensitivity of an option's price to a change in the price of the underlying stock.
Options Delta - Introduction
http://www.optiontradingpedia.com/options_delta.htm
In layman terms, delta is that options greek which tells you how much money a stock option will rise or drop in value with a $1 rise or drop in the underlying stock, which also translates to the amount of profit you will make when the underlying stock rises. This means that the higher the delta value a stock option has, the more it will rise with every $1 rise in the underlying stock. Stock options with options delta of 0.7 is expected to rise $0.70 with a $1 rise in the underlying stock. Stock options value is affected most by changes in the price of the underlying stock, making delta value of stock options the single most important options greeks to understand in options trading.
Options Delta - Characteristics
Positive & Negative Options Delta Values
Options delta values are either positive or negative. Call Options have positive delta values suggesting that it will gain in value proportionately with a gain in value in the underlying stock. Put Options have negative delta values suggesting that it will lose value as the underlying stock rises. Conversely, call options with its positive delta values drops in price as the underlying stock falls and put options with its negative delta values gains in price as the underlying stock falls. In short, positive delta value becomes profitable as the stock goes up and negative delta value becomes profitable as the stock goes down.
Options Delta & Options Moneyness
Options delta value rises as options gets more and more In The Money (ITM) and reduces as the options gets more and more Out Of The Money (OTM). At The Money Options, no matter call or put options, have delta value of 0.5, suggesting a 50% chance of either ending up In The Money or Out Of The Money. Learn about Options Moneyness now.
Options Delta & Time to Expiration
When there is lesser time to expiration, the chances of options staying in their prevailing state of moneyness by expiration increases. This means that the nearer to expiration an option is, the more likely it is that in the money options will stay in the money by expiration and out of the money options staying out of the money by expiration. As such, the nearer to expiration, the higher the options delta value of in the money options would be and the lower the delta value of out of the money would be at the same strike price. Learn about Options Expiration now.
Rate Of Change Of Options Delta
Options delta value changes as it gets more and more in the money or out of the money. This rate of change is governed by another options greeks known as Gamma.
Options Delta - What It Suggests
There are 2 main ways to look at what options delta mean. It is first an indication of how much the value of the option will move with a $1 move in the underlying stock (all else equal, disregarding volatility), secondly, it is also an indication of the approximate probability that the option will end up In The Money (ITM) by expiration. Options with delta value of 1 is pricing in a 100% probability of ending up In The Money by expiration. Options with delta value of 0.5 is pricing in a 50% probability of ending up In The Money by expiration.
http://www.optionseducation.org/tools/faq/option_price_behavior.html
GREEKS for AAPL
You can look on the 1option.com site...for better answer...not an easy process of understanding options and pricing and all the mixed terminology that goes with them...and then there's them "greeks"...and implied volatility...to make you even more crazy...If you want the leverage you get with options without understanding pricing you're likely speculating/gambling...best be short term and if it don't make sense...step aside close the gamble until it does make sense.
high implied volatility
http://www.1option.com/index.php?/ask_me/comments/how_should_i_approach_high_implied_volatility_stock_options/
Every month we can always find options with very high implied volatility, especially from pharmacuetical companies that are waiting for FDA approval. Is there any proven way to profit from this situation regardless of the decision of FDA? (please, don't recommend a straddle)
Option Trading Answer
Anytime you see a spike in implied volatility it tells you that uncertainty has entered the picture. The professionals that make markets in that underlying attach a probability to the various outcomes and they calculate the impact on the profitability of the company. Then they price the options using complex proprietary algorithms. They have a staff of analysts running through the numbers and making phone calls within their network to try and find a shred of information that will give them an edge. I’m sure in some cases they have an employee in the courtroom waiting for the verdict to be read. In the end, I can’t compete in this arena. These large institutions have millions to throw at the event, I do not.
I run from these situations and I view them as a crapshoot. If you see a steady climb in IV and the stock has not moved, it means there is news pending.
Look for situations where the outcome is predictable - like a stock with a nice tight trading pattern and consistent earnings. Form an opinion, take a stand and know when to admit you are right or wrong (target, stop).
An answer to a early question, some stocks just do not have the correct delta to trade options, might be a great stock, but lousy options trader,,
Option Price Behavior
Why didn't my option move as much as the underlying stock?
Options will not move as much as their underlying stock unless they are in-the-money and/or very close to expiration. There are valid mathematical reasons for this. The amount an option can be expected to move (all other conditions being equal) given a 1-point move in the underlying stock is called delta. Delta is derived from the Black-Scholes formula for pricing options and represents roughly how much the option behaves like the underlying stock. A delta of .50, for example, means that an option can be expected (all other things being equal) to move about fifty cents for every $1 move in the underlying stock. Delta will change with time to expiration as the option moves more in- or out-of-the-money, and will also be affected by the volatility of the underlying stock.
Implied Volatility: Buy Low And Sell High
http://www.investopedia.com/articles/optioninvestor/08/implied-volatility.asp#axzz27LrTqMT9
Standard Deviation (Volatility)
http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:standard_deviation
Options Gamma - Definition
Options Gamma is the rate of change of options delta with a small rise in the price of the underlying stock.
Options Gamma - Introduction
Just as options delta measures how much the value of an option changes with a change in the price of the underlying stock, Options Gamma describes how much the options delta changes as the price of the underlying stock changes. Of the 5 options greeks, Delta and Gamma are the only ones that are related to each other and that Options Gamma is the only options greek that describes the change of another greek. That makes understanding options delta and Options Gamma extremely important to all options trading beginners.
Why Is Options Gamma Important?
Options Gamma is important because it affects the single options greek that determines the value of stock options most and that is the options delta. There is no question that options delta changes as it starts off at 0.5 when it is At The Money and then gradually move towards 1 as the options go deeper In The Money or gradually towards 0 as the options go farther Out Of The Money. The real question is, by what magnitude would the options delta change? Options Gamma measures that magnitude as well as the direction of change.
So, why is understanding the magnitude and direction of the change of options delta represented by its Gamma important?
Understanding Options Gamma is important for both directional and hedging trades. In directional trades, one would want an overall position Gamma to lean towards the direction of interest so that options delta expands as the trade develops. In hedging trades, one would want as low an overall options gamma as possible so that the options trading position remains as neutral to changes in the underlying stock as possible. Such hedging method has come to be known as Gamma Neutral Hedging.
Of course, if you are only buying call options or put options for a single directional trade, Options Gamma really have little to do with you because you can be sure that you are already buying positive Options Gamma which will increase the delta of your options as the stock rises or falls accordingly. Positive Options Gamma ensures that the delta of your options increases as it goes more and more in the money, increasing your profitability.
As such, Options Gamma is important to understand for options traders starting complex options strategies for the first time and for options traders who manage many complex options positions within a single portfolio like Market Makers do.
Options Delta - Definition
Options Delta measures the sensitivity of an option's price to a change in the price of the underlying stock.
Options Delta - Introduction
http://www.optiontradingpedia.com/options_delta.htm
In layman terms, delta is that options greek which tells you how much money a stock option will rise or drop in value with a $1 rise or drop in the underlying stock, which also translates to the amount of profit you will make when the underlying stock rises. This means that the higher the delta value a stock option has, the more it will rise with every $1 rise in the underlying stock. Stock options with options delta of 0.7 is expected to rise $0.70 with a $1 rise in the underlying stock. Stock options value is affected most by changes in the price of the underlying stock, making delta value of stock options the single most important options greeks to understand in options trading.
Options Delta - Characteristics
Positive & Negative Options Delta Values
Options delta values are either positive or negative. Call Options have positive delta values suggesting that it will gain in value proportionately with a gain in value in the underlying stock. Put Options have negative delta values suggesting that it will lose value as the underlying stock rises. Conversely, call options with its positive delta values drops in price as the underlying stock falls and put options with its negative delta values gains in price as the underlying stock falls. In short, positive delta value becomes profitable as the stock goes up and negative delta value becomes profitable as the stock goes down.
Options Delta & Options Moneyness
Options delta value rises as options gets more and more In The Money (ITM) and reduces as the options gets more and more Out Of The Money (OTM). At The Money Options, no matter call or put options, have delta value of 0.5, suggesting a 50% chance of either ending up In The Money or Out Of The Money. Learn about Options Moneyness now.
Options Delta & Time to Expiration
When there is lesser time to expiration, the chances of options staying in their prevailing state of moneyness by expiration increases. This means that the nearer to expiration an option is, the more likely it is that in the money options will stay in the money by expiration and out of the money options staying out of the money by expiration. As such, the nearer to expiration, the higher the options delta value of in the money options would be and the lower the delta value of out of the money would be at the same strike price. Learn about Options Expiration now.
Rate Of Change Of Options Delta
Options delta value changes as it gets more and more in the money or out of the money. This rate of change is governed by another options greeks known as Gamma.
Options Delta - What It Suggests
There are 2 main ways to look at what options delta mean. It is first an indication of how much the value of the option will move with a $1 move in the underlying stock (all else equal, disregarding volatility), secondly, it is also an indication of the approximate probability that the option will end up In The Money (ITM) by expiration. Options with delta value of 1 is pricing in a 100% probability of ending up In The Money by expiration. Options with delta value of 0.5 is pricing in a 50% probability of ending up In The Money by expiration.
http://www.optionseducation.org/tools/faq/option_price_behavior.html
GREEKS for AAPL
Join the InvestorsHub Community
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
