volatility arbitrage with options
DESCRIPTION
Presentation about Volatility Arbitrage Techniques using Options at the London Traders & Investors ClubTRANSCRIPT
London Traders and
Investors Club
Options Trading and
Volatility Arbitrage
Introduction1 ) DEFINITIONS AND BASIC
STRATEGIES
2) COMPLEX STRATEGIES
3) GREEK LETTERS
4) Q & A
CALL/PUT OPTIONS
THE BUYER /SELLER HAS THE RIGHT (BUT NOT THE OBLIGATION) TO BUY / SELL A SPECIFIED QUANTITY OF A SECURITY AT A SPECIFIED PRICE (STRIKE PRICE) WITHIN A FIXED PERIOD OF TIME (EXPIRATION)
TYPES OF OPTIONS
AT THE MONEY
STRIKE PRICE OF THE OPTION
=UNDERLYING ASSET PRICE
TYPES OF OPTIONS
IN THE MONEY
UNDERLYING ASSET PRICE IS ABOVE / BELOW
STRIKE PRICE OF THE OPTION
TYPES OF OPTIONS
OUT OF THE MONEY
UNDERLYING ASSET PRICE IS ABOVE / BELOW
THE OPTION’S STRIKE PRICE
Long Call
Short Call
Long Put
Short Put
Complex Strategies
Long Strangle Construction
BUY 1 OTM CALL
BUY 1 OTM PUT
Long Strangle
SIGNIFICANT VOLATILITY OF THE UNDERLYING ASSET EXPECTED IN THE NEAR TERM
Long Strangle
Short Strangle Construction
SELL 1 OTM CALL
SELL 1 OTM PUT
Short Strangle
LITTLE VOLATILITY IN THE UNDERLYING ASSET EXPECTED IN THE NEAR TERM
Short Strangle
Long Straddle Construction
BUY 1 ATM CALL
BUY 1 ATM PUT
Long Straddle
SIGNIFICANT VOLATILITY EXPECETED IN THE NEAR TEARM
Long Straddle
Short Straddle Construction
SELL 1 ATM CALL
SELL 1 ATM PUT
Short Straddle
LITTLE VOLATILITY EXPERIENCED BY THE UNDERLYING IN THE NEAR TERM
Short Straddle
Butterfly Spread Construction
BUY 1 ITM CALL
SELL 2 ATM CALLS
BUY 1 ATM CALL
Butterfly Spread
THE UNDERLYING ASSET IS EXPECTED NOT TO FALL OR RISE MUCH BY EXPIRATION
Butterfly Spread
Greek Letters
THETA1) IT MEASURES THE SENSITIVITY
OF AN OPTION TO TIME DECAY
2) IT TELLS HOW MUCH MONEY THE OPTION PRICE WILL LOSE FOR EVERY DAY THAT PASSES
THETA
THETALONG POSITION = YOU WANT NEGATIVE
THETA VALUES
SHORT POSITION = YOU WANT POSITIVE THETA VALUES
Delta IT MEASURES THE
SENSITIVITY OF AN OPTION TO UNDERLYING ASSET PRICE MOVEMENTS
Delta
DeltaCALL OPTIONS HAVE POSITIVE DELTAS
(0;1)
PUT OPTIONS HAVE NEGATIVE DELTAS (-1;0)
Delta IF THE DELTA OF A CALL
OPTION IS 0.75 IT MEANS THAT FOR EVERY 1 POINT MOVEMENT IN THE UNDERLYING ASSET THE OPTION PREMIUM WILL INCREASE BY 0.75
VEGA PROBALY THE MOST IMPORTANT
GREEK
IT MEASURES THE SENSITIVITY OF AN OPTION TO THE UNDERLYING ASSET VOLATILITY FLUCTUATIONS
Vega
VegaIF YOU SHORT A CALL / PUT = YOU
WANT LOW VEGA VALUES
IF YOU LONG A CALL / PUT = YOU WANT HIGH VEGA VALUES