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Options Trading / Gaining the Edge & VIX Curve Implications Options Leverage has become increasingly popular over the past decade. In the past 30 months, their popularity has risen significantly relative to the Underlying Instrument. Increasingly so, Options tend to move Prices through the effects of Leverage. This is why we see Stocks Split, it vastly reduces the Price of Entry and increases the Potential for increased participation. As in all Markets, Liquidity plays the most important Function. ________________________________________________________________________________ The Traders Edge is best capitalized through an understanding of the Derivatives/Options Greeks as well as VIX timing (previously discussed and linked below). I will thoroughly explain the relationships and provide direct correlations using Price in each example. Simplicity will become self-evident after All the Variables are explained. Directional Risk Management is the Traders Edge. It provides the Risk/Reward parameters in Options Trading will make you a far better Options Trader. ________________________________________________________________________________ Options are a 1st Tier Derivative, ie. - their value is "derived" from an underlying asset. How this value is derived depends upon a number of factors: 1. The 5 Greeks and their functions - Delta, Gamma, Theta, Vega & Rho. With any Derivative - Dependent and Independent Variables define the Function. Greek Dependent Variable Independent Variable Delta Option price Value of Underlying Asset Gamma Delta Value of Underlying Asset Vega Option Price Volatility Theta Option Price Time to Maturity Rho Option Price Sensitivity to Risk-Free Rates Let's put this into context with simple and concise examples of each. ________________________________________________________________________________ Delta - How much the Options Price will increase or decrease with a $1 move in the Price of the underlying Instrument. By Example: Underlying Price of Instrument = $100 Options Premium = $2 Delta = $0.60 For instance - were the Price to move from $100 to $101 the Price of the Option would increase by 60 Cents to $2.60. Were the Price to decline from $100 to $99 in the underlying instrument, the Price of the Option would decline to $1.40 ($2.00 - $0.60). It is extremely important to understand Implied Delta is to occur at any point in time prior to or upon Expiration. Think of Delta as the Probability of your Options Potential, as well, it is actually the Number of Shares relative to the Options 100 Share implied leverage. An out-of-the-money Call Option with a 0.25 Delta has an estimated 25% probability of being in the money at expiration. A deep-in-the-money call option with a 0.90 Delta has an estimated 90% probability of being in the money at expiration. A Delta of 1 cannot occur as it implies Par with the underlying instrument and provides Zero incentive/profit Potential. This is important as we can observe it would be far more intelligent to purchase the underlying outright. For example, with a Delta of 1, for every $ move higher in the underlying, the option price would rise by $100. As you can see there is no incentive to simply not purchase the underlying instrument, it becomes a zero-sum game. Think of Delta in its simplest form with respect to Leverage. Delta in my example above is $0.60 - you are leveraging 60 Shares as opposed to 100 @ a theoretical Delta of 1. Delta's implied theoretical ranges: Calls - 0 to 1 Puts - 0 to (-1) Actual Range @ the Money 0.50 Delta - therefore a Trader is leveraging 50 shares. Why? Because a Trader does not technically own the shares. Consider it the Options Writers Profit Margin or Vig. The further in the Money on an options chain, the higher the Probability your Option will have less Risk. Of course, there is a premium to Risk/Reward as we move lower and away from the underlying Instrument or Share Price. ________________________________________________________________________________ Gamma - How much Delta change with a $1 move in the underlying Price. Delta and Gamma are both affected by Price movements up or down by $1 increments. Continuing our Example above: Underlying Price of Instrument = $100 Options Premium = $2 Delta = $0.60 Gamma = 0.012 For instance - were the Price to move from $100 to $101 the Price of the Option would increase by 60 Cents to $2.60. The Delta will change as it will include Gamma after the $1 Price increase: Delta 0.60 + 0.012 or - 0.612, the New Delta or $2.612. As the Option price moves towards In the Money, once again - Gamma will increase. It is important to lock down the context, these are Price relationships - Delta and Gamma. ________________________________________________________________________________ Theta - Options Prices decrease as Time passes moving to the Expiration Date aka "Time Decay" There are 2 distinct variables to decay. 1. Intrinsic Value: Simply put a Call option will have Intrinsic Value when the underlying Asset is above the Strike price of the Option. By Example: Underlying Price of Instrument = $100 Option Strike Price = $90 Intrinsic Value of Call Option = $10 ($100 - $90) Intrinsic Values can only range from Zero to a Positive number. For Put Options, the Value is the opposite, or when the underlying Aesst is below the Strike Price of the Option. Underlying Price of Instrument = $100 Option Strike Price = $110 Intrinsic Value of Call Option = $10 ($110 - $100) Intrinsic Value is Directly related to Price and only changes when the underlying Price changes. Time has no impact on an Options Intrinsic Value given there is no change in the price of the Underlying Asset. 2. Extrinsic Value: aka "Time Value" or Options with more time until expiration will have more Extrinsic Value than Options with less time until Expiration for the same underlying Asset for the same Expiration Cycle. ie. OPEX Date. Why? Over time Price ranges have the potential to expand and contract. Expansion leads to Contraction and vice versa. LEAP Options - 365 or more Days to Expiration have immense Extrinsic Value due to the component of time. It is important to note Theta begins its larger declines within 30 to 45 Days of Expiration. Theta goes steeply negative within this timeframe with a very High Probability. "Time" truly is Money - Extrinsically. Less Time, less Extrinsic Value, less Money. Options lose Time Value (Extrinsic) - Theta is expressed as a Negative Number. By Example: Underlying Price of Instrument = $100 Theta = $0.50 Time to Expiration = 10 Days Option Strike Price = $90 ($10 Intrinsic Value) Theta (decay) $0.50 X Time (duration) 10 Days = $5.00 of Extrinsic loss over Time to Expiration (Theta). Projected Theta Burn (decay) implies the Price of the Option will be $95. * This assumes there is No Change in Implied Volatility (More on this later). It is important to note when your Portfolio may show a steady change in Portfolio Theta, this is should not be assumed to be a linear function as Delta or Change is the only Constant. Markets move Higher and Lower with increasing Volatility. Changes can and are significant. ________________________________________________________________________________ Vega - Changes in an Options Value with respect to a 1% Change in Volatility or the Implied Volatility (aka the Widow Maker). Why the Widow Maker? If (IV) Implied Volatility drops significantly while the Underlying Asset's Price remains constant. This is an extreme example, but one that has become increasingly more common since September of 2021. Implied Volatility is the expected change to Price in the Underlying Asset's can change over time. Consider it the Price Range. It is important to remember an Options Price must change for Implied Volatility to change. Simply Put - a change in demand for an Option over time will determine its Implied Volatility. Supply becomes a Factor as Risk (implied volatility changes) - you would not want to assume the Risk of selling Naked Puts in a downtrend. Supply would decrease and Premiums would rise. The overall level of confidence and Fear would dictate demands while Supply would Price Risk. Conversely - and this is the Key, any option with a Higher Extrinsic Value will have higher Implied Volatility. By Example: Underlying Asset 1 Price = $110 Call = $100 IV = .69 Underlying Asset 2 Price = $105 Call = $100 IV = .47 A favorite time for the IV Crush is into Earnings of the Underlying as Volatility drops significantly aka - Buy the Rumor, Sell the News. As well, the timing of VIX Roll to Settle play a very large Role in Vega, as does the term Structure of the VIX Curve. Timing and Positioning in Time are the leys to the proverbial Kingdom in Options Trading. An Options Price changes by its Vega with a corresponding move in the Underlying Price of the Assets, Implied Volatility will rise by 1% By Example: Underlying Price of Instrument = $100 Option Strike Price = $90 Intrinsic Value = $10 Vega = 0.25 Implied Volatility = 60% Option Price $10 + Vega $0.25 = $10.25 Implied Volatily = 60% + 1% = 61% What has the highest exposure to Vega? Options At the Money and those with High Extrinsic Values. Remember, Volatility scales with Time, contraction to expansion. By Example: Implied Volatility is expressed on a 365 Day Basis. $100 Underlying Price Implied Volatility = .25 We can simply calculate the Range for the Underlying Price for the next 30 days: 1 Month Range = $100 x 0.25 x Square Root (30/365) Or $3.45 either side of $100 Or $103.45 to $96.65 or a $6.90 range. Finally - and of extreme importance: The shorter the Duration the more Extremes in Volatility affect Price. A large Decrease or Increase in an Underlying Assets price will have a far more pronounced effect on Options of shorter Duration. Melt ups and Melt Downs can be anticipated for Large moves in Leverage and isn't this what today's Options Trader is seeking.. the answer is yes, absolutely. The Setups require patience and an Edge over the Greeks. ________________________________________________________________________________ Rho - Measures the sensitivity of the option price relative to interest rates. A benchmark Interest Rate increases by 1% - Option Prices will change by Rho's Value as a percentage. Rho is presently within an arrangement unseen in prior Cycles, be it Business or Credit. The Treasury Curve, as well as the Effective Funds Rate, have direct Impacts upon Rho. Underlying's Alpha (Which has lower Volatility and higher Pricing Power) has less sensitivity to Rho - to a point, a point where Rates become too burdensome on the Economy. Underlying Beta (Which has Higher Volatility and Lower Pricing Power) has more sensitivity to Rho as forward Earnings are more steeply discounted to Low Beta or low to high Alpha. Given the tumultuous environment currently, Rho is being turned on its head as this Cycle is quite frankly unlike any in history. it Rhymes, yes, its repeat will be similar to Long Cycle Durations. This primarily due to the expansion of Credit and Default/Liquidity Risks present which are unseen in Human History. In prior expansions, rising yields had a profound effect on Bank's Balance Sheets. That was then, Rho would provide a lift to Delta increasing the Value of an option. The exact opposite is beginning to occur now and will likely stay in trend for some time. The math is exactly the same as above, this is where you, dear trader get to exercise your skills in what you have learned. Reminder: Delta and Gamma are Price Calculated in $1 Increments. Theta, Vega, and Rho are Percentage Calculated in 1% Increments. ________________________________________________________________________________ This week will be particularly challenging given the sheer size of this Expiration @ Quad Witching in Septenber 16th. With CPI due Wednesday and the FOMC the following week. It's going to be Volatile in the extreme. I hope this helped you in gaining an Edge with respect to trading Options. Trade Safely, with the Edge, and Good Luck this Week. - HK Please remember the VIX roll to Settle Strategies I discussed here -
TVC:VIX
by HK_L61
5
LABU 3X Leverage BIOTECHNOLOGY a potential Recession playLABU a 3x leveraged EFT in the biotechnology sector has diverse holdings. My thesis is that biotechnology and healthcare are relatively unhinged from the broader general market. Here I chart LABU / QQQ ratio to determine relative strength. On this weekly chart, the ratio and so relative strength are at more than a 52 week low. The MACD indicator shows the MACD and signal line ascending and below the histogram.; moreover the MACD in green is running above the signal line. This favors a trend reversal. All in all, this seems to be a setup for a long swing trade or investment. I will take a trade in a call option with a strike 50% higher than current price as I see a potential for a large percentage gain for LABU. The diversity of the ETF will serve to mitigate some of the risk. A stop loss will be 1% below current price with an expectation of more than a 50 % return in the remainder of the calendar year but far more in the case of the call option scenario
AMEX:LABULong
by AwesomeAvani
Deepak Nitrate Go Long above the given levelDeepak Nitrate Go Long above the given levelDeepak Nitrate Go Long above the given levelDeepak Nitrate Go Long above the given levelDeepak Nitrate Go Long above the given levelDeepak Nitrate Go Long above the given levelDeepak Nitrate Go Long above the given levelDeepak Nitrate Go Long above the given levelDeepak Nitrate Go Long above the given levelDeepak Nitrate Go Long above the given levelDeepak Nitrate Go Long above the given levelDeepak Nitrate Go Long above the given levelDeepak Nitrate Go Long above the given level
NSE:DEEPAKNTRLong
by Hardikjethwa
PCC - Options Volumes 71% DeclineLiquidity within Leveraged products was used to provide a bid for the Underlying on Gamma/Delta. With the overall decline in participation, we are seeing Micro Range Squeezes develop when it is "Time". Friday's trade was a run to Square, and with the Retail Options players levered up in 420 Spy Calls... there was no chance they would be paid. The PCC remains useful although in a tighter range from .86 to 1.12. Looking over the June 17s - "an Entity is looking for a deep correction of 20%+" maximum-pain.com
USI:PCC
by HK_L61