Testimonials

February 20, 2014

Socrates and Another Famous Greek

We all know options are derivatives, and their prices are derived from the underlying stock, index, or ETF. But with other factors at work such as implied volatility, time decay, etc. Have you ever wondered how can you know how much an option is going to move with respect to say the underlying? Very simple – check out its delta.

Delta is arguably the most

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heavily identifiable Greek (unless you count Socrates or Aristotle) especially by individuals learning to trade options. It offers a quick and relatively easy way to tell us what to expect from our option positions as we watch the price action of the underlying. Calls have positive deltas, as they typically move higher on a rise in the stock, and puts have negative deltas, as they typically move lower when the stock rises.

While some investors view delta as the percentage chance an option has of expiring in-the-money, it is really more of a way to project expected appreciation or depreciation. A delta of 0.50 for an AAPL call suggests the option should move 50 cents higher when the AAPL jumps a dollar, and lose 50 cents for every dollar loss in AAPL.

But delta is only foolproof when all other factors are held constant, which is rarely the case (and certainly never the case for time decay). If an option is moving more (or less) than its delta would suggest, it is likely because other variables are shifting. For example, buying demand might be pushing implied volatility higher, raising the price of the options. Still, this king of all Greeks is a good starting point for gauging how your options are likely to move.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

December 26, 2013

Gamma and AAPL

Many option traders will refer to the trifecta of option greeks as delta, theta and vega. But the next most important greek is gamma. Options gamma is a one of the so-called second-order options greeks. It is, if you will, a derivative of a derivative. Specifically, it is the rate of change of an option’s delta relative to a change in the underlying security.

Using options gamma can quickly become very mathematical and tedious for novice option traders. But, for newbies to option trading, here’s what you need to learn to trade using gamma:

When you buy options you get positive gamma. That means your deltas always change in your favor. You get longer deltas as the market rises; and you get short deltas as the market falls. For a simple trade like an AAPL January 565 long call that has a delta of 0.51 and gamma of 0.0115 , a trader makes money at an increasing rate as the stock rises and loses money at a decreasing rate as the stock falls. Positive gamma is a good thing.

When you sell options you get negative gamma. That means your deltas always change to your detriment. You get shorter deltas as the market rises; and you get longer deltas as the market falls. Here again, for a simple trade like a short call, that means you lose money at an increasing rate as the stock rises and make money at a decreasing rate as the stock falls. Negative gamma is a bad thing.

Start by understanding options gamma from this simple

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perspective. Then, later, worry about working in the math.

Happy New Year!

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

July 3, 2013

Jennifer Aniston and Another Famous Greek

We all know options are derivatives, and their prices are derived from the underlying stock, index, or ETF.  But with other factors at work such as implied volatility, time decay, etc. Have you ever wondered how can you know how much an option is going to move with respect to say the underlying?  Very simple – check out its delta.

Delta is arguably the most heavily watched Greek (unless you count Jennifer Aniston) especially by individuals learning to trade options. It offers a quick and relatively easy way to tell us what to expect from our option positions as we watch the price action of the underlying.  Calls have positive deltas, as they typically move higher on a rise in the stock, and puts have negative deltas, as they typically move lower when the stock rises.

While some investors view delta as the percentage chance an option has of expiring in-the-money, it is really more of a way to project expected appreciation or depreciation.  A delta of 0.50 for an AAPL call suggests the option should move 50 cents higher when the AAPL jumps a dollar, and lose 50 cents for every dollar loss in AAPL.

But delta is only foolproof when all other factors are held constant, which is rarely the case (and certainly never the case for time decay).  If an option is moving more (or less) than its delta would suggest, it is likely because other variables are shifting.  For example, buying demand might be pushing implied volatility higher, raising the price of the options.  Still, this king of all Greeks is a good starting point for gauging how your options are likely to move.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

May 17, 2012

Option Gamma and AAPL

The trifecta of option greeks are delta, theta and vega. But the next most important greek is gamma. Options gamma is a one of the so-called second-order options greeks. It is, if you will, a derivative of a derivative. Specifically, it is the rate of change of an option’s delta relative to a change in the underlying security.

Using options gamma can quickly become very mathematical and tedious for novice option traders. But, for newbies to option trading, here’s what you need to learn to trade using gamma:

When you buy options you get positive gamma. That means your deltas always change in your favor. You get longer deltas as the market rises; and you get short deltas as the market falls. For a simple trade like an AAPL June 540 long call that has a delta of 0.48 and gamma of 0.008 , a trader makes money at an increasing rate as the stock rises and loses money at a decreasing rate as the stock falls. Positive gamma is a good thing.

When you sell options you get negative gamma. That means your deltas always change to your detriment. You get shorter deltas as the market rises; and you get longer deltas as the market falls. Here again, for a simple trade like a short call, that means you lose money at an increasing rate as the stock rises and make money at a decreasing rate as the stock falls. Negative gamma is a bad thing.

Start by understanding options gamma from this simplistic perspective. Then, later, worry about working in the math.

Edited by John Kmiecik

Senior Options Instructor

Market Taker Mentoring

May 10, 2012

Trading with Delta on AAPL

Filed under: Options Education — Tags: , , , — Dan Passarelli @ 10:31 am

We all know options are derivatives, and their prices are derived from the underlying stock, index, or ETF.  But with other factors at work – implied volatility, time decay, etc. – how can you know how much an option is going to move with respect to said underlying?  Very simple – check out its delta.

Delta is arguably the most heavily watched Greek especially by individuals learning to trade options. It offers a quick-and-dirty way of telling us what to expect from our option positions as we watch the price action of the underlying.  Calls have positive deltas, as they typically move higher on a rise in the stock, and puts have negative deltas, as they typically move lower when the stock rises.

While some investors view delta as the percentage chance an option has of expiring in-the-money, it is really more of a way to project expected appreciation or depreciation.  A delta of 50 for an AAPL call suggests the option should move 50 cents higher when the AAPL jumps a dollar, and lose 50 cents for every dollar loss in AAPL.

But delta is only foolproof when all other factors hold static, which is rarely the case (and certainly never the case for time decay).  If an option is moving more (or less) than its delta would suggest, it is likely because other variables are shifting.  For example, buying demand might be pushing implied volatility higher, raising the price of the options.  Still, this king of all Greeks is a good starting point for gauging how your options are likely to move.

Edited by John Kmiecik

Senior Options Instructor

Market Taker Mentoring