The Rookie’s Guide to Options - by Mark Wolfinger #

Date Read: 2020-07-12 #

Notes #

option price = intrinsic value (how much it is ITM) + time value (volatility & time to expiration)

When buying options, you profit only if stock closes above strike by option price.

• (1) buy OTM option = time value
• (2) sell near expiration = intrinsic value
• (2) > (1) to profit from buying options

equivalent positions: S = C -P

Basic Strategies:

• Covered Call Writing: S -C
• Collar: S -C +P
• ≈ “sell put spread”: -P(high) + P(low)
• ≈ “buy call spread”: +C(low) -C(high)
• Cash-secured Put Writing: -P

Greeks

Delta 𝛿

• Bullish = long delta, positive delta
• C = 0 to 100
• P = -100 to 0
• S = 100
• e.g. C𝛿 = 30. If S +$1, C +$0.30
• e.g. P𝛿 = -60. If S +$1, P -$0.60
• 𝛿 measures expected change as underlying changes by $1.
• 𝛿 is probability option finish ITM.
• Position 𝛿 is also the equivalent number of shares.

Gamma γ

• γ is the rate of change of 𝛿 when S +$1.
• buying options = positive γ

vega ν

• v is always positive
• v measures the change in option price when there is a one point change in volatility
• Typical v, longer term option > nearer term.
• Typical v, OTM > ATM > ITM.

theta θ

• θ is the change in option price as one day passes
• option owners have negative θ
• option sellers have positive θ

Checklist for selling put spreads

• bullish bias
• OTM reasonably
• high probability of expiring worthless, look for low delta (1-8)
• enough premium to be worth selling. Look at price. Check if bid-ask spread is too risky for a quick exit
• position size as if you are holding stock
• CONS: poor risk reward ratio

Iron condors

When you have no bullish or bearish bias, when you believe it will be range bound.