DRAFT Understanding The Option Greeks

Understanding The Option Greeks

If you want to be a consistently successful options trader then understanding the Option Greeks is essential.  Trading options without the Greeks would be like driving an 18 wheel semi truck or piloting an aircraft with no instruments!  That’s not a ride I would knowingly take because the risk is just too high.  It’s true, The Greeks can be a bit confusing at first, but with a little study, they become the instruments to navigate, options trades properly.

History Of The Option Greeks

In 1973 to mathematicians, Fischer Black and Myron Sholes published a paper titled “The Pricing of Options and Corporate Liabilities.”  From that paper, the so named, “Black-Scholes Pricing Model” was born.  The idea behind the model was to eliminate risk by using mathematically correct hedging strategies.

The men won the 1997 Nobel Price for their groundbreaking work in mathematics although the model had some well-known problems.  Many modifications and variations of the Black-Sholes formula for derivative pricing exist today.  However, the original model remains the most widely accepted.

The Greeks and Option Pricing

When it comes pricing option contacts, the movement of the underlying equity is only part of the equation.  In fact, the Greeks; Delta, Gamma, Theta, Vega, and Rho are all part of the pricing model inputs.  After running the equation, the option contract is displayed for us in an Options Chain.  As we delve deeper into the details of each Option Greek, please refer to the option chain provided below.

Options Greeks Chain

Defining The Greeks

Delta – is the Speed of Change but also often described as Percent Chance.

Gamma – represents the Acceleration of movement.

Theta – represents the pricing effect of the passage of time (Time Decay).

Vega – is the pricing effect of Volatility.

Rho – provides the pricing effect of Interest Rates.

Delta As Speed of Change

Delta – the amount and option price is expected to change based on $1 move of the underlying equity?

As stated above Delta has a duel meaning, Speed of Change and Percent Chance.  The Speed of Change refers to the how fast an option price will move up or down based upon a $1.00 change in the underlying equity.  Call options have positive Delta while Put options have negative Delta.  If an underlying stock is trading exactly at $60 a share, then the At-The-Money 60 Strike Call option should have an approximate Delta value of +0.50.  Conversely, the 60 Strike Put should have an estimated Delta value -0.50.

Let’s use an example from the Options Chain above to make this easier to understand.  The 25 Strike Call is selling at  $2.07 a share and a Delta of $0.79.  If the underlying stock goes up by $1.00, and the 25 Strike option should improve in value by $0.79.  Thus making it worth $2.86 per share.  What if the stock goes down $1.00?  Then Delta tells us we could expect the 25 Strike option to lose $0.79 and valued at $1.28 per share.

Call options have a Delta that can be between 0.0 and 1.00.  At expiration, In-The-Money (ITM) calls options have a Delta of 1 and become stock while Out-Of-The-Money (OTM) call options expire with a Delta of 0 and become worthless.  As expiration draws near the Delta of ITM options will move toward 1.00 making them more sensitive to the underlying’s price movement than longer dated options.  Put Options have a Delta that is between 0.0 and -1.00.  At expiration ITM put options have a Delta of -1 and become stock, while OTM put options expire with a Delta of 0 and become worthless.

Delta As Percent Chance

We can also think of Delta as Percent Chance.  The 27 Strike Call option in the table above shows us that this ITM option has a Delta of 0.88.  Based on how the options are currently trading the 27 Strike contract theoretically, has an 88 Percent Chance of remaining ITM by expiration.  At the same time, the 27 Strike Put which is currently Out-Of-The-Money OTM and having a Delta of just -0.12 only has a 12 Percent Chance of being ITM by expiration, theoretically.

It is important to note, the prices represented are theoretical.  Actual prices could differ based upon other factors such as a volatility increase (Vega).

Gamma

Gamma is the rate that Delta will change based on a $1 change in the underlying stock price.

If Delta is the “speed” at which option prices change, then you can think of Gamma as the Acceleration.  It’s not uncommon to hear Gamma referred to as the Delta of Delta.  A high Gamma value will make an option more responsive to changes in the price of the underlying stock.  Conversely, a low Gamma value will make an option less responsive to changes in the underlying stock.  In the option chain above you will see that Gamma values are the higher for options contracts At-The-Money (ATM).  Gamma diminishes on deeper ITM contacts and those that fall further OTM.

As long the option holders forecast is correct, having a high Gamma value is a good thing because Delta will move toward 1.00 more rapidly.  On the other hand, the expectation is incorrect; a higher Gamma value will lower your Delta quite quickly toward 0.0.

As an option seller, if your forecast is incorrect, high Gamma is your enemy and will cause a position to move against you with a higher acceleration.

Again using the 25 Strike option as and example; The call option has a Gamma of 0.12 which means Delta should increase to 0.91 if the underlying move up $1.00.  If the stock moves down $1.00 then Delta should decrease 0.12 to a value of 0.67.   Of course, the 25 Strike Put Delta value would decrease if the stock’s price improves but increase as the underlying declines.

Theta

Theta is the amount the price of calls and puts will decrease (at least in theory) for a one-day change in the time to expiration.

The one absolute truth about option contracts is that they all expire.  Theta tells us at what rate per day we can expect an option contract to decay as time passes.  Theta accelerates the rate at which an option decays as it nears expiration.  Thus, Theta has a greater effect on short-dated options and less of an effect on longer dated options.  Options with less than 30 days to expiration will experience a quickening of Theta’s decay rate as expiry approaches.   Theta’s rate of decay will become nearly parabolic in the final 2 weeks of an options life.

A wise options trader must always consider Theta when planning a potential position.  It is not only important to be correct in the forecast direction of a stock move but also the timing.  As an option holder, Theta is a mortal enemy and ever present.  Options writers, on the other hand, think if Theta as a friend, allowing the passage of time to work in their favor.  Obviously, there is nothing we can do to stop time from passing but with some thoughtful planning, the effect of Theta can be minimized or even capitalized upon.

Using the options chain above the 25 Strike call has a Theta of 0.03, suggests (in theory) the option price would decline by 0.03 per day.  Theta is an equal opportunity Greek affecting value of the 25 Strike Put contracts and decaying their value on a daily basis as well.

 

 

FREE Swing Trade Ideas

A Doji Close – Indecision for the Day and no Chart Direction

A Doji Close – Indecision for the Day and no Chart DirectionFrom a Bull’s Eye SPY:

Friday’s Doji close was a day of indecision, and you can see from the 2, 3, 4, and 5-day charts you have the same Doji indecision. Even out to the monthly chart there are Doji candles. What all this means; is no direction, no decisiveness, bulls, and bears hoping the other leaves the game.

Banking stocks report this week, KBW, KBE, and FAS are currently trending down with the T-Line below the 34-ema. These 3 ETF charts KBW, KBE, and FAS could help with determining how and what you trade in the next few weeks.

FREE Trade Idea – IPXL

Daily Chart – The Bullish J-Hook pattern within the HRC (RBB) strategy broke out Friday suggesting more upside. For a possible 50% profit plus in more than one swing.

IPXL Trade Details on the members Trade Ideas Page.

Today we have10+ trade ideas located on the each day.

HRC Member Benifits>| Change your trading forever and reach your goals

Spotlight Trade – AKRX

AKRX –  Popped 18% Friday coming out of the J-Hook continuation pattern and AKRX is up 34.83% after we posted it to our members on February 28. Please take a min and look at the chart – Could you have picked up 1 or 2 of those swings?

After breaking out into an HRC (RBB) pattern, AXRX gave us a Belt Hold, a couple of breakouts and a Bullish J-Jook pattern.

Bullish J-Hook Pattern

Spotting the J-Hook pattern is easy because it looks like the letter “J.” This pattern is part of up-trending price action that takes a little dip before resuming the trend. The key is to look for three or four candlesticks that have lower highs because this may be the beginning of the J-Hook pattern. Then the price will stop moving down and start moving sideways. The lows of the candlesticks in this part of the J-Hook pattern stay in the same range. You can draw a box around the candlesticks that form the bottom of the J-Hook. Price then starts to move higher and breaks up and out of the sideways price action. Read More.

Investing and Trading involve significant financial risk and is not suitable for everyone. No communication from Hit and Run Candlesticks or it’s associates IS NOT financial or trading advice. All information is intended for Educational Purposes Only. Terms of Service

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© 2007 – 2017 Hit & Run Candlesticks – Right Way Options – Strategic Swing Trade Service – Trader Vision – All Rights Reserved. Terms of Service Investing and Trading involves significant financial risk and is not suitable for everyone. No communication from Rick Saddler, Doug Campbell or this website IS NOT financial or trading advice. All information is intended for Educational Purposes Only.

Right Way Options Morning Market Prep Posted 7:50 AN EDT

The Market has a fresh set of downs.  What team are you rooting for?  

Market Game DayA fresh set of downs for the market but which team will prevail?  As some of you know, I’m from Nebraska.  However, you may not know that I’m a huge college football, Nebraska Cornhusker fan.  No matter if the team is winning or losing every time they come out on the field with a fresh set of downs there is a renewed optimism.   I am unashamed to admit I have a Husker bias and always want them to win.  It’s a very good thing I don’t have any money on the line!

When the market has a fresh set of downs, and we do have money on the line, it’s natural to root for your team.  If you’re long on stocks, naturally the Bulls are your team and therefore optimistic of a win.  As a result, you have a bias, and it can affect the way you see a chart.  However, let’s not forget the Bears are still on the field and they have equally committed fans that want them to win.

As traders with money on the line, it is important that we step back from our bias and look at a chart objectively.  There are times when it is clear you’re team has the advantage and momentum to make you money.  To be consistently profitable and trade professionally we have to recognize and admit when the momentum has shifted and we can lose money.  For some traders that mean’s it’s time to switch teams and short the market. For other traders, it mean’s they should put that money back in their pocket, stand aside and just watch the game.

On the Calendar

Today on the Economic Calendar the only thing of relevance is Janet Yellen speaking at 4:10 Eastern time.  On the Earnings Calendar, there are 20 companies reporting today.  All in all a pretty boring market news day.

Action Plan

With the futures basically, flat this morning and the chart continuing to show that the Bears have the advantage of a downtrend my plan to be exercise patience.  Of course, I will be managing current positions and prepared for new trades, but I will patiently wait for the market to decide which direction.  Perhaps there will be news out of Washington D.C. that will inspire the market, but unless that happens, I’m expecting more chop.  Unless support or resistance breaks I honestly don’t think there will be much to do.

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Trade Wisely,

Doug

The Options Chain Demystified Posted 4-9-17

The Options Chain Demystified.  Use It With Confidence!

Options Chain EducationAt first glance, an options chain with all blinking, flashing and fast moving numbers is intimidating.  What does it all mean?  How do you make sense of what appears quite chaotic?  Which one is the right one to choose?  These are all valid questions that immediately come to mind for new options traders.  By the time you finish this article, you will find that the options chain is a very efficient tool.  Not only is it easy to understand but provides a wealth of valuable information.

By the time you finish this article, you will find that the options chain is a very efficient tool.  Not only is it easy to understand but provides a wealth of valuable information.

What is an Options Chain

The options chain is a matrix (chain) of available contracts listed for a given security.  Searching through an entire list of all the options available for a given security could be a daunting task.  To solve that problem an options chain groups the contacts into a series based on the expiration dates.  As an example, the July XYZ option contract series will have have the same date of expiry.

Within a given expiration series price quotes are displayed for each of the available Strike Prices.  There are stock and ETF’s that have contracts available in $1.00 increments.  While others only provide contracts in increments in $2.50, $5.00 and even $10.  It should go without say that the trader must focus on the details of each contract to avoid making mistakes that could prove very costly!

The Option Strike Price is most commonly listed down the middle of the overall option chain.  Grouped to the left of the strike price you will find the Call Option Contracts.  Conversely, you will find Put Option Contracts displayed to the right of the strike price.  Below is a representation of the typical options chain layout.

Although this configuration of is very common, not all brokers display option chains in the same manner.  Each trader is highly encouraged to check with your broker and acquaint yourself with the tools and resources that they proved.  It’s of critical importance to know how to use the tools properly and efficiently.  In the heat of the moment is not the time to learn how to use your trading tools!

Options Chain

 Options Chain of XYZ: Assume the underlying stock is trading at $26.50 

Bid/Ask SpreadOptions Chain bid_ask

Each listed options contract has two prices.  The Bid Price and the Ask Price.  The Ask Price is the price you will pay to purchase the option contract.  The Bid Price is what you will receive if you sell the option contract.  The difference between the Bid Price and Ask Price is called the Bid/Ask Spread and in the options world is referred to a Slippage.

For the stock trader, the Bid/Ask spread is negligible, often as small as one penny.  However, for the options trader, the Bid/Ask spread can be significant and an important consideration for all positions.  Heavily traded options contracts such as found in the SPY ETF often have small bid/ask spreads of just a few cents.  Options with large bid/ask spreads can often provide a warning of insufficient volume that a wise trader should.

Visualize Moneyness Using The Options Chain

Using the options chain above the stock XYZ is currently trading at $26.50 a share.  Looking at the 26 Strike Call, you will notice it is highlighted or shaded in with a different color.  In fact, every strike price lower than 26 has been shaded in to signify that they are In-The-Money (ITM) contracts.  For example, with the XYZ stock currently trading at $26.50 then the 26 Strike contract is ITM by $.050.  The 25 Strike is ITM by $1.50.  Furthermore, the 26 Strike contract has an Intrinsic Value of $0.50 and an Extrinsic Value of $0.81.

All of the Call option contracts higher than 26 are Out-Of-The-Money (OTM).  The OTM Call options have $0.00 Intrinsic Value and $1.31 of Extrinsic Value.  You will learn more about Intrinsic and Extrinsic values when you study the Option Greeks.

Conversely, on the Put side of the Options Chain, you will find that the 27 Strike contracts and higher are ITM having both Intrinsic and Extrinsic Value.  The Put contracts Strikes 26 and below are OTM having only Extrinsic value.  OTM has zero Intrinsic value.

Slippage

Options Chain SlippageThe term Slippage describes the effect of the bid/ask spread on the trade.  For example, let’s assume we want to buy a JUN 25 Call option because we think the stock is about ready to move up in price.  (See the options chain provided above.)  The Bid Price for the JUN 25 Call is quoted at $1.99 and the Ask Price $2.07.  Buying a single contract costs $207 (excluding commissions), however, if we immediately sell the contract we would only receive $199 (bid price).  Thus, creating a slippage loss of $8.00.  In this example the slippage is relatively small, however, Bid/Ask spreads can be substantially larger.   It’s imperative the trader identify the cost and evaluate how it may affect the overall trade decision.

Most noteworthy is that your brokerage account will immediately display a loss in your account on a filled position.  In this example, the slippage is only $0.08 per share but still a consideration in the overall position.  It is not uncommon to find very large bid/ask spreads.  It is incumbent on the options trader to evaluate the slippage cost of all contracts

Starting off in a new position with a loss is far from ideal, so it is vital to evaluate the bid/ask spread before making any new trade decision.  Look before you leap because the mistake of unknowingly entering a new position with an excessively large bid/ask spread can be a costly lesson.

Mid Price

The Mid-Price describes the middle price between the Bid and the Ask.  Although not listed on the options chain it is commonly used by options traders.  If the Bid/Ask Spread is wide, traders will often try to negotiate a better price by submitting an order at the Mid-Price.

More Than Just a Price Quote

Many brokerage firms nowadays offer options chains that allow customization to the user needs.  They have the ability to display data pertinent to the options trader along with the price quotes.  These tools can be Options Chain tools_of_the_tradeinvaluable to the trader helping them identify the best contract for their strategy.  They also help in avoiding option contracts that don’t meet the trader’s rules.  For example, an option contract may not have enough volume or open interest (contracts held) to fit the trader’s requirements.

Contacting your broker to learn about the tools available to you is highly recommended.  It may require a little extra time learning to efficiently use the tools but in the long run, it’s time well spent.

I wish you great success!

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Falling Window Candlestick Pattern

Last Updated: April 7, 2017

If you ask me, the best names for candlestick patterns are the ones that spark your imagination. The Falling Window is a perfect example. When you hear that creative title, you can imagine a window dropping or sliding or even melting to the ground like one of Dalí’s clocks. Perhaps surprisingly, the lovely name refers to a very simple (but still significant) price action. To discover the formation and value of the Falling Window candlestick pattern, please scroll down.
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Right Way Options Morning Market Prep Posted at 8:00 AM EDT

The Overall Markets Continues to Downtrend.  Can the Employment Report Inspire the Bulls?

Markets Job ReportThe markets slow, steady push upward yesterday showed that the Bulls were still in the fight.  Although they still had a lot of work to do, I began to invasion a break of the downtrend.  I had started to think that the Bulls just might have gained an edge over the Bears on the battlefield of resistance.  As the afternoon session progressed, the Bears seemed to regain the upper hand, particularly in the DIA chart.  My visions of Friday break of resistance faded as well, but I was holding out hope that the Friday report could inspire the Bulls.

Then during the evening, we heard of the US retaliation attack on Syria with 59 Tomahawk missiles.  I quickly took at look at the futures as they quickly moved south on the news.  The good news is that because I have to trade plan, a process that I follow and a set of rules to protect me from Me.  Because of it, my capital is safe, and I was able to sleep like a baby.

For those of you that don’t have a plan, I have to ask, What are you waiting for?  They are not that difficult to develop.  In fact, the time invested in developing a well thought out trading plan could prove to be the best money you have ever spent!   I can attest to that truth as it has saved me from my emotions and foolish ideas more times than I can count.  Just buckle down and get it done!

Calendar Events

This morning we get Mac Daddy report for the week.  The Employment Situation report provides a clue to the health of the overall markets and thus can easily move the market upon its release.  The ADP on Wednesday painted a pretty picture of jobs growth, so most are expecting today’s number to be very positive.  However, a big jobs number can also be a double-edged sword.  If the number is too hot, it could force the FOMC to act sooner expected on interest rates encouraging the Bears.

Plan of Action

My plan for the morning is to relax with my wife and enjoy and nice breakfast.  I will completely ignore all the drama and hype before and immediately after the report.  My charts are marked up, and I’m prepared to act if and only if price action warrants.  My stops are in place; my risk is within my tolerance acceptable zone, and I have the discipline to wait calmly.  Anything is possible.  The markets have a lot to chew on this morning, so I’m expecting considerable volatility.

I wish you all a profitable day and fantastic weekend!

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Trade Wisely,

Doug

FREE Swing Trade Ideas

The Feds Through a Spanking on the Market

Free Swing Trade IdeasFrom a Bull’s Eye

The Feds through a spanking on the market when they said they had 4.5 trillion to unwind from the balance sheet.
SPY lost about 1.06% top to bottom – IWM lost about 2.42% about top to bottom, LOL that woke a few people up yesterday. For some time now we have been warning our member’s not to get too long and blind to the bear. These charts have been giving warning signs and clues, we have faith and trust our chart indicators, in fact, we trust them so much we have been holding TZA and UVXW for a few days now. Let’s take the SPY one step at a time – SPY $233.20

FREE Trade Idea – DK

Daily Chart – The chart has created a bearish “h” pattern and a Blue Ice Failure. The pattern developed after the Bears had their way with a Bearish Engulf and a double top. Price has pulled the T-Line below the 34-ema, the 50-sma is next.
Trader’s Tip – Look at the 3-Day chart, and you can see that the bears are not allowing the Bulls to get through the 200-sma
Today we have 10+ trade ideas located on the members trade ideas page each day.

Today we have 9 more members trade ideas located on the members trade ideas page.

Spotlight Trade – BOFI (short)

BOFI (short) –  Closed lower yesterday pushing the gain to 19.98%. The trade started after HRC posted the short trade to the members.  BOIF was a failing chart and then begun to draw a Bearish “h” Patten. Price crawled up a bit and then rolled south, broke through our dotted deuce and headed to the 200-sma. Note the

Bearish “h” (Uptrend Reversal) Pattern Basics

The Bearish “h” pattern looks like the letter “h” and is considered an uptrend reversal pattern. It forms as part of down trending price action. You might say that this is the upside down version of the Bullish J-Hook pattern. As price pulls back from a swing high, the key is to look for a brief rally with three or four candlesticks that have higher highs because this may be part of the Bearish “h” pattern. After this, price stops moving up and start moving sideways.

The highs of the candlesticks in this part of the “h” pattern stay in the same price range. You can literally draw a box around the candlesticks that form the top of the Bearish “h” pattern. Price then starts to move lower and breaks down and out of the sideways price action. Price continues lower and breaks down below the low at the start of the pattern. This breakdown confirms the Bearish “h” pattern and signals a shorting opportunity. The downtrend resumes and price moves lower. Read More.

Investing and Trading involve significant financial risk and is not suitable for everyone. No communication from Hit and Run Candlesticks or it’s associates should be considered as financial or trading advice. All information is intended for Educational Purposes Only. Terms of Service

Members trade ideas below

Scanned from Tc2000  |  10-15 trade ideas daily

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007 – 2017 Hit & Run Candlesticks – Right Way Options – Strategic Swing Trade Service – Trader Vision – All Rights Reserved. Terms of Service Investing and Trading involves significant financial risk and is not suitable for everyone. No communication from Rick Saddler, Doug Campbell or this website should be considered as financial or trading advice. All information is intended for Educational Purposes Only.