What Looks Too Good To Be True Almost Always Is
Remember, events like stock splits, spinoffs, and other events that re-shuffle the corporate deck also affect options. Here’s an example that illustrates why what looks too good to be true almost always is.
The Greeks: Delta
Understanding how options behave means knowing about the various options “Greeks.” Here, we take a look at the most important of the measurements, delta.
Time Value And Option Decay
All other things being equal, an option value decays in time.
More On Calendar Spreads
This is the kind of more precise information you can get from a computer program, which produces the values for our site, and it contains within it all the considerations pertinent to the problem, making it unnecessary to struggle with the kind of time decay analysis attempted above.
Volatility And Value
Three kinds of volatility concern option traders: the future volatility of the underlying, the historical volatility of the underlying, and the implied volatility of the option.
High Volume Options Opportunities
A member has asked if extraordinarily high put volume might be a contrarian indicator, in that it may come from parties who have made large stock purchases and are protecting their positions.
Estimating The Future
Suppose you have conducted a careful analysis of the implied volatility of the OEX options, as represented by the VIX, and conclude that the VIX will decline.
Special Trades For Special Situations
Takeovers, stock buybacks, class action lawsuits, bankruptcies, etc., are special situations that offer special trading opportunities.
The VIX
if you trade options of any kind, you should perform some analysis of what you think the VIX (or the implied volatility of the underlying in the case of non-OEX underlyings) as well as the OEX or other underlying.
Conversions And Reversals
In the past I have mentioned that puts and calls with the same strike and expiration almost always have approximately the same implied volatility. The reason for this is closely related to synthetics.
Synthetic Positions
While a long put position is bearish, a short put position is bullish–it gains if the underlying rises (albeit by the maximum amount of the premium of the put) and loses if the underlying declines.
Relative Strength
The Black-Scholes option pricing model takes a neutral view of a stock’s future. It treats high relative strength stocks and low relative strength stocks the same way, measuring the value of options on these stocks using only each stock’s volatility.