What is Options Greek?

Options price can be influenced by a number of factors which are called the Options Greek. They are Delta, Theta, Vega and Gamma.  Before getting started trading options, you might want to understand how these factors can change the optios characteristics. 

Delta: 

The ratio of the change of the underlying asset's price to the change of the call or put options.

It is from the range of 0.00 to 1.00. For example, if the delta is +0.50, which refers to every $1 movement of the stock, your call options premium will be increased $0.50.  

On the hand, for put options delta will be negative, let say delta is -0.50, every $1 increase in the underlying stock, there will be $0.50 decrease for your put options premium. As the In-The-Money call/put options near its expiration, the delta will become +1 or -1 respectively.

Delta is very sensitive to Time and Volatility especially ITM or OTM option, ATM option will be immuned to these two factors. Both ATM Options that is 60 days to expiration and 10 days to expiration have the delta of close to 0.50.  

Theta: 

Theta is the rate of decline in options premium regards to the time remaining. Options value will be decreased as the time value decrease, Theta is the measure for the time value. Therefore remember, Theta related to Time. (T for time) 

For example, if Theta is 0.05, it means everyday the options premium will be drop $0.05 each day. Options premium will drop like waterfall when it comes to expiration, therefore Theta will be increased when it near the options' expiry date. 

Theta will be highest for ATM option because it has the most extrinsic value than ITM or OTM options. 

Gamma: 

Gamma is the measure of rate of change in delta, similar to acceleration when talking about speed. It tells you how much the delta change when the stock price moves $1.00. Gamma will be largest only when the options is near the money. 

Gamma basically is telling how stable is the delta, if Gamma is close to 0, the change of delta is gradual. If Gamma is big, it means a small move of the underlying asset can cause a significant change of the options premium. 

Vega: 

Vega is related to Volatility (V for Volatility). Vega tell us the change of the options premium as the implied volatity change 1.00%.  

Options premium is very much influenced by the volatility of the underlying asset, if the volatility is high, options premium will be increased, when the underlying asset is stable - no volatility, options premium is cheap. With this characteristic, options seller always benefited from the implied volatily drop as the options premium will be decreased tremendously.

For example, ABC Call option has implied volatility of 40%, vega 0.1, and its premium is $1.00. When its IV (Implied volatility move to 41%, the option premium will increase to $1.1 now.  

How to read the Greek Table: 

I will show you an example here to understand the Greek number here in the Interactive Broker format:

QQQQ is trading at 29.5 level, which means that 29 Call is ITM (in the money) and 30 is near OTM (out the money). 

I have used eight examples - 25, 29, 30 and 35 options with Dec 31 and Jan 16 expiration options.

1. Delta - Delta is the highest when Options is deeper In-the-money and become less when it is further Out-of-the-money. Put Options has minus delta. 25 Call has Delta of 0.97 but 35 Call only has Delta of 0.0244 in this example. Therefore, for 29 Call option (Dec) which is +0.5919, the premium will be increased if QQQQ moves up to $30.5 from the current $29.5. 

2. Gamma - 29 Option has the highest Gamma because delta change the most when it is ATM. Gamma become smaller when it is ITM and OTM, which means the delta change will be smaller than ATM option. 

3. Vega - 29 Option has the highest Vega as believe that At the money has the highest volatity. Use the same example of 29 Call Option (Dec), Vega is 0.016 , current IV is 40.52%, if IV increase to 41.52%, the premium will be $0.87 + $0.016 = $0.886. 

4. Theta - Jan options has longer time before expiration, therefore Theta for Jan options is smaller than Dec options.  

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What is Options Greek?

Is Stock Options Trading Risky?

Are Stock Options Risky?

Most people believe that option players are extreme risk takers. After all, they purchase an asset with a very short life, and hope it skyrockets in value. Option buyers might make 500% or more if they buy the right option, just as they would do if they picked the winning horse at the track.

The waiting period to see if you're a big winner is a little longer than a horse race, but not much. In a month on two, if the stock does not go way up, you lose your entire investment bet. Just tear up your ticket. You picked the wrong horse.

If the stock stays flat, most option buyers lose their entire bet as well. No wonder people think option trading is risky. At least if you buy a stock, and it stays flat, you don't lose anything but the opportunity to have done better in another investment.

When you buy an option, it is a declining asset. It depreciates faster than a new car. It becomes worthless in a matter of months.

High-risk, high reward - that is an investment fact embraced by most people. They believe that any system that offers the opportunity for extraordinary profits must necessarily involve an inordinately high degree of risk.

Nothing could be further from the truth when it comes to intelligent options trading.

I am reminded of the legend of the blind men examining an elephant - each man touched a single part of the animal, and came to an entirely different conclusion as to what he was touching.

Viewed as single transactions, the following two statements are undeniably true:

1) Buying stock options is extremely risky.

Buying stock options may indeed be the risky kind of investment that scares most prudent investors. If we examined this one small part of stock market investing, we could understandably conclude that stock options investing involved high risk.

2) Selling stock options is even more risky.

Selling stock options, when viewed as a single transaction, is even worse! Selling an option alone is called selling naked (because that's how you feel the whole time you have that short sale in your account). You have the possibility of unlimited risk. You can lose many times more money than you invested. At least at the horse race, you only lose the money you bet.

No wonder people believe that stock options trading is risky. There seems to be extreme risk all around. Just like the blind men examining the elephant, they are only looking at a single part of the picture.

Since most people have not made the effort to understand stock options, they quickly conclude that the risk level is too high for them, and put their money into a "safe" place like mutual funds. Somehow if they are paying some "expert" to pick the stocks they own, they delude themselves into believing they are investing prudently.

Nothing could be further from the truth.

If your money is in a "safe" mutual fund, these are the facts:

1) If stocks go up, you will make money (but your profits will be reduced by the management fees, sales fees, and expenses you incur). For the past 50 years, the stock market has gained an average of about 10% a year. That is the most gain you should expect with your mutual fund investments.

2) If stocks stay flat, you lose money (management fees and inflation reduce the value of your holdings).

3) If stocks go down in value, you lose money.

Contrast those facts with the case of a properly executed stock options investment (such as the 10K Strategy I suggest):

1) If the underlying stock goes up, you make money, often at a rate of over 100% a year.

2) If the underlying stock stays flat, you make money, often at a rate of over 100% a year.

3) If the underlying stock goes down, you may still make a profit. Only if the stock goes down a great deal in a very short time will you lose money. (Of course, your mutual fund would get clobbered in this scenario as well.)

Which of the above two investments seems to be the most risky? It seems to me that the mutual fund investment is a whole lot riskier than the stock options investment (not to mention that it yields a profit of only 1/10th what the stock option portfolio might gain).

Why then does stock option investing get such a bad rap on the risk issue? It is clearly due to the fact that people look at only a single part of the picture (buying or selling options) and ignore the total picture.

They conclude that if buying options is dangerous, and selling options is even more dangerous, that option trading must be doubly dangerous. It does not occur to most people that a system of simultaneously buying and selling options might be even less risky than owning the stock. This is the case, but most people never take the next step and learn the truth.

The truth is that a properly-executed stock options strategy is considerably less risky than the purchase of stock or a mutual fund. However, it takes work. You will have to learn a little about how options work, and be an active part of the investment process. You can't plunk down your money like you do with a mutual fund, and passively ignore your investment.

The fact that stock options investing takes work discourages most people from even considering an investment in stock options. That is fine with me. When I compare my returns each year with what the mutual funds are making, I feel like a real winner. I may work a little harder, but that's a small price to pay for the returns I make.

In 2003, my QQQ stock option portfolio increased in value by 196%. My subscribers who followed my trades presumably did just as well. How many mutual funds do you suppose gained that much?

My Options Tutorial Program takes most of the work out of this process for you. First, you will receive a series of lessons, one each day for thirteen days. These will familiarize you with, and help you understand, the most important aspects of stock options.

Second, I have seven actual stock option portfolios for you to watch, and mirror if you wish. Whenever I make a trade, I email you so you can do the same in your own account if you wish.

Third, if you would rather have me do the work for you, I have set up an Auto-Trade program at OptionsXpress or thinkorswim that will automatically make the trades for you in the account that you have funded there. This takes all of the work out of your busy hands. You should understand the system, but then I will do the work for you.

As always, I am here to answer your email inquiries and to help with any questions that you may have. Terry

Dr.Terry Allen: http://www.terrystips.com Stock Options Trading Article Source: http://EzineArticles.com/?expert=Dr._Terry_Allen

Is Stock Options Trading Risky?

Understanding stock options' strike price, exercise and expiration date

by A.W. Berry

Options are a loan contract given to an investor or investors so they may leverage their financial position to a greater level. An options contract allows the investor to purchase a large volume of securities on 'margin' at a proportionally lower but representative price with the knowledge that (s)he may have to pay back the financial institution if the option does not perform the way the investor intended. Unlike regular stock trading, options are traded with the intent and choice of either selling or buying the underlying securities within the options contract. In other words, the options trader has an option or choice regarding how money is intended to be made i.e either a rise or decline in the security. There is a fair amount of financial lingo associated with options trading but three of the more important and fundamental terms are strike price, expiration date and exercise.

Strike Price:

Options are traded as 'calls' or 'puts' a call option is purchased with the intent to purchase the stocks in the option. This future purchase price is called the strike price and is different from the option price. If the price of a stock goes up during the term of the option, the trader or investor may get a deal having locked into a lower strike price. An option strike price may also be a sell price in the case of a 'put'. This is also called short selling as the trader is betting the stock will go down during the term of the option. For example, if a trader buys a put option of Pear Inc. with a strike price of $55.67 and the price of Pear Inc. drops during the term of the option, the trader can then sell the option at the strike price of $55.67 and make a profit if the option cost was lower than the strike price.

Expiration Date:

Options are purchased with time limits. Like a bottles of milk, options expire at a set date in the future. This time limit is often in increments of 30 days. For example, if an option is purchased at the beginning of the month, that option will likely expire at the end of that same month. However options can be bought with expirations several months into the future. The usual extent of options is four months but some options have what are called 'LEAPS' which allow options contracts to exist for more than four months. For example, if it is July now, a July option can be bought with an expiration of July 31 or an August option can be bought with an expiration in August. If LEAPS are available for the option, a contract for November should also be available.

Exercising and Option:

The terms of an option require the buyer to either exercise, continue or cover an option. When exercising a call option for example, the investor buys in at the predetermined strike price stated in the option. If the price of a stock has increased enough half way through the options term, it is a calculated decision by the investor to exercise the option before its expiration. If the price goes down, the trader can either wait and hope the price will go back up or cover his or her position by exercising at a loss. Naturally, this is not a favorable scenario for an options trader.

Options are a leveraged form of securities trading and make possible high volumes of exchange. Options can be traded for stock, commodities and currency markets. Options are bought ahead of time based on the traders anticipation of either an increase or decrease in the actual price of the security being traded and not the option price itself. Options contracts are separate from the underlying securities which they represent in the sense that the contract is a unique financial instrument in and of itself. In the case of stock options, a brokerage firm would offer a margin to the investor so they may utilize the options market. While there are quite a few intricacies and terms associated with options trading, three of the most important aspects of options are the strike price, expiration date and the exercising of the options contract.

Sources:

http://www.investopedia.com/terms/s/strikeprice.a sp 
http://en.wikipedia.org/wiki/Option_(finance) 
http://www.investopedia.com/articles/optioninvesto r/03/090303.asp 
http://invest-faq.com/articles/deriv-option-basics .html 
http://en.wikipedia.org/wiki/Exercise_(options) 

Learn more about this author, A.W. Berry.

Understanding stock options' strike price, exercise and expiration date

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My trading site at www.traderwork.com

Dear readers, 

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If you are interested to learn about options trading, please visit my site at TraderWork.com. 

Thanks for support!

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Basic understanding about Options Trading

Many people dare not trade option, and the major hindrance to them is that they feel that options trading is complicated with lots of strategy involved. Besides, option price is not as straight forward as stock price, it involves a series of calculation and formula. In fact, the one that come out with the option premium formula had gotten the Nobel Price for economic, they are no other than Myron Scholes and Robert Merton.

Though I agree that there is certain level of complication, but the advantages of option would have motivated us to learn more about options trading.

Basically, option is just a contract, this contract is the right for you to buy or sell the stock at certain price within certain time frame, but without obligation. You can imagine that option is just like an agreement between you and the seller of a house, this agreement is for you to purchase the house at certain price, but it has expiry date, and no body can be sure about the future price of that house.

The house price is $100k, it cost you $5k in order to draft out an agreement, and it said that from now until 6 months later, you can buy this house at $100k. You believe that the house price will go up within 6 months. 2 months later, the house price has gone up to $110k, some one (let’s call him A) approach you to buy your contract because he does not want to buy the house with the total sum, therefore he will pay you $15k to purchase your agreement and he think that the house price will go up further within the next 4 months. 2 months has passed and the house price stabilized at $110k, A decided to sell his contract to some one (let’s say B) at $15k. 2 month later, the house price has dropped from $110K to $80K. Instead of losing $30k, B made a loss of only $15K (which is the contract price) and the contract expired worthlessly by now.

Option to buy a stock is call option, and put option is to sell the stock. The benefit of option is the power of leverage, you have the right to buy or sell within that period of time without paying for the full amount. This helps you to minimize the risk.

The targeted stock price in option is strike price, it is also known as exercise price. If the stock is above the strike price, your call option is in the money, otherwise, your option is out of money. For put option to be in the money, the stock has to be below the strike price. The premium of the option is total sum of intrinsic and time value.

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Basic understanding about Options Trading

Trading Journal 18 Sept 08

Today market bounced back to bullish from the start, until now, seem like the financial woes has been calm down at the moment. Of course, this thanks to the effort of Fed and europe centr

Symbol: HPQ
Stratgey: Bull put spread (47.5/45)
- make a strategy change yesterday when a potential bear market was observed
- buy back my sold leg almost the same price when sold it

Left my bought leg (45 put) continue to run for profit,but today seems like the bull has won the battle (at least until now, 11am NY time), therefore end my position with small gain.

Buy: $1.01
Sell:$1.20
Profit/loss: ard +$107

HPQ plunged to 46 level yesterday, but this stock remain strong as the trendline support just beneath the stock level.But with the financial woes hovering in the market, I believe the Bear is still hiding somewhere just waiting for the next attack.

Happy trading!

Trading Journal 18 Sept 08