Straddles And Strangles
Last week I explained how a day trader could purchase catastrophe protection at a reasonable cost by buying a deep out-of-the-money (OOTM) call and a deep OOTM put with several months left to expiration.
Straddles (continued)
One of the stocks in yesterday’s Explosion List is SEEK, which closed at $41.00. Looking at strikes close to $40, we see that the SEEK September 40 call, with a theoretical value of $7.88 based upon SEEK’s 100-day volatility, was selling for $5.00, and its September 40 put, with a theoretical value of $6.63, was selling for $3.875.
Straddles
A straddle is a spread consisting of a put and a call, either both long or both short, with the same strike price and expiration.
Options for Day Traders:
The object of the sell stop is to get you out of your long position if the market moves against you by a certain amount.
Volatilities of Arbitrary Time Periods
Volatility is usually presented on a annualized basis. For instance, a volatility of 30% tells you that in a year you expect the underlying price to fluctuate by about 30%.
How Deep Is Deep-In-the-Money?
Using the standard deviation (the volatility times the current stock price) as a benchmark and measuring strike prices in this way, you can develop a more uniform approach to choosing strike prices, such as for covered writes.
Financial Chess
Options trading is like financial chess. Gary Kasparov, the world chess champion, is currently playing the entire world on the Internet (www.zone.com/kasparov).
Covered Writes: Puts
When considering covered writes, most traders think of selling a call against a long position in the stock, with the object of gaining the call’s premium over intrinsic value. However, you also can write puts with the same object.
Another Use For Delta
We have noted here that deep ITM calls have delta almost equal to 1.0 and, in connection with the covered write discussion, that deep ITM calls have an almost 100% chance of expiring in-the-money.
Covered Writes (continued)
Suppose a stock is selling for $75 a share and you are looking at call options on it with the object of writing one of them and covering your short position with a long position in the stock.
Covered Writes
If you write a call on a stock and do nothing else, you can lose money even if the call is overpriced.
Developing Option Skills
Options are an especially technical area of trading. The better you understand them, the more strategies you will have at your disposal and the better you will be able to execute those strategies.