Theta is one of the more important Greeks when trading short-term options. It is the daily decay that occurs in the option. In other words, it is the change in the value of the option for the passage of 1 day. Many people look at options in terms of absolute cash outlay, but fail to … More Understanding Greeks – Theta
Gamma is the first and widely expected most important second order derivative. Other second order derivatives won’t be touched on for a while, as they are more important as traders get involved with volatility trading and complex position structures. Gamma is the change in the option’s Delta for a change in the underlying value. What … More Understanding Greeks – Gamma
Vega is generally the most important risk for a Volatility trader. This is because it is the input into the options model that the trader can control. Implied Volatility is a measure of the future expected volatility of the underlying asset. As investors buy options, the Implied Volatility goes up, and the impact of these … More Understanding Greeks – Vega
Delta is the easiest of the Greeks for most investors and traders to understand. Delta is the expected profit per $1 move in the underlying. If you are long a 40 Delta call, you expect to make $0.40 on a $1 rally in the underlying. There are a number of ways that we can describe … More Understanding Greeks – Delta
There are many reasons that options are used by market participants. Day traders often look for quick access to leverage. Hedgers may be looking to reduce their delta exposure to lock in profits (think about oil producers here – they often sell deferred calls and buy deferred puts to hedge expected future production). Large investors … More Options Level The Playing Field
The normal rule of thumb that people argue is that long puts are used if you are bearish. But, just as calls don’t always pay you on a rally, being long a put doesn’t always pay if the market sells off. If implied volatility is high and the break is small or takes time, the … More How Do Puts Work?
The normal rule of thumb that people argue is that long calls are used if you are bullish. But, you have to remember that being long a call doesn’t always pay if the market rallies. If implied volatility is high and the rally is small or takes time, the call will not pay off the … More How Do Calls Work?
To really get the most out of this educational experience, we need to start at the very basic building blocks. The first question that we need to answer is what exactly is an option. An American Option is a financial contract that gives the owner the right, but not the obligation to buy or sell … More What Is An Option?
Hello and welcome to the Trade Academy blog. I want to start by giving you a bit of background on why I am here and what you can expect from me. I believe the world of options trading is inefficient in many ways. The markets are not priced perfectly because the market participants are not … More Welcome to Trade Academy