Welcome to the Options Education World

1. Welcome to The World of Options Trading My blogs takes you to the options education world

2. Implied Volatility and Bull Put Spreads 1. Implied Volatility and Bull Put Spreads Selling bull put spreads during a period of high implied volatility can be a wise strategy, as options are more “expensive” and an option trader will receive a higher premium than if he or she sold the bull put spread during a time of low or average implied volatility. 2. Outlook and the VIX The VIX measures the implied volatility of S&P 500 index options and it typically represents the market’s expectation of stock market volatility. Usually when the VIX rises, so does the implied volatility of options. 3. Selling the Spread If the VIX was still at 12 percent like it had been previously, the implied volatility of these options could be lower and the trader might only be able to sell the spread for 0.90 versus 1.00 when it was at 18%. Final Thoughts When examining possible option plays and implied volatility is at a level higher than normal, traders may be drawn to credit spreads like the bull put spread.

3. A Butterfly Spread Used Directionally For the most part, option traders use butterfly spreads for a neutral outlook on the underlying. The position is structured to profit from time decay but with the added benefit of a “margin of error” around the position depending on what strike prices are chosen. A Butterfly The long butterfly spread involves selling two options at one strike and the purchasing options above and below equidistant from the sold strikes. This is usually implemented with all calls or all puts. Directional Butterfly To implement a directional butterfly, a trader needs to include both price and time in his outlook for the stock.  Final Thoughts One of the biggest advantages of a directional butterfly spread is that it can be a relatively low risk and high reward strategy depending on how the spread is designed.

4. Do You Understand Settlement? Many option traders limit their universe of option trading to two broad categories. One group consists of individual equities and the similar group of exchange traded funds (ETFs). The other group is composed of a multitude of broad based index products. When this first group we are discussing settles, it is by the act of buying or selling shares of the underlying equity/ETF at the particular strike price. The second category, the broad based index underlyings, are also termed “cash settled index options”. This category would include a number of indices, for example RUT and SPX. One critically important fact with which the trader needs to be familiar with is the unusual method of determining the settlement price of many of the underlyings; it is NOT the same as settlement described above. When in doubt the best way to go is to ask your broker how they will handle settlement for your particular situation and and tell you what alternatives you might have.

5. Your Overall Option Delta Delta is probably the first greek an option trader learns and is focused on. In fact it can be a critical starting point when learning to trade options. The delta of a single call can range anywhere from 0 to 1.00 and the delta of a single put can range from 0 to -1.00. Generally at-the-money (ATM) options have a delta close to 0.50 for a long call and -0.50 for a long put. Taking the above paragraph into context, one may be able to derive that the delta of an option depends a great deal on the price of the stock relative to the strike price of the option. Calculating the position delta is critical for understanding the potential risk/reward of a trader’s position and also of his or her total portfolio as well. If a trader’s portfolio delta is large (positive or negative), then the overall market performance will have a strong impact on the traders profit or loss.

6. Going for the Long Ball with OTM Call Options It seems like almost every other week in my Group Coaching class, a student will ask me about buying deep out-of-the money (OTM) options. Many option traders especially those that are new initially buy deep out-of-the-money options because they are cheap and can offer a huge reward. Negative Factors Many factors work against the success of a deep OTM call from profiting. The call’s delta (rate of change of an option relative to a change in the underlying) will typically be so small that even if the stock starts to rise, the call’s premium will not increase much. For more blogs like this visit the following link http://blog.markettaker.com/