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Options Spread
Options spreads are the basic building blocks of many options trading strategies. A spread position is entered by buying and selling options of the same class on the same underlying security but with different strike prices or expiration dates. An option spread shouldn't be confused with a spread option. The three main classes of spreads are the horizontal spread, the vertical spread and the diagonal spread. They are grouped by the relationships between the strike price and expiration dates of the options involved - *Vertical spreads, or money spreads, are spreads involving options of the same underlying security, same expiration month, but at different strike prices. *Horizontal, calendar spreads, or time spreads are created using options of the same underlying security, same strike prices but with different expiration dates. *Diagonal spreads are constructed using options of the same underlying security but different strike prices and expiration dates. They are called diagona ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Options Strategies
Option strategies are the simultaneous, and often mixed, buying or selling of one or more options that differ in one or more of the options' variables. Call options, simply known as Calls, give the buyer a right to buy a particular stock at that option's strike price. Opposite to that are Put options, simply known as Puts, which give the buyer the right to sell a particular stock at the option's strike price. This is often done to gain exposure to a specific type of opportunity or risk while eliminating other risks as part of a trading strategy. A very straightforward strategy might simply be the buying or selling of a single option; however, option strategies often refer to a combination of simultaneous buying and or selling of options. Options strategies allow traders to profit from movements in the underlying assets based on market sentiment (i.e., bullish, bearish or neutral). In the case of neutral strategies, they can be further classified into those that are bullish on ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Ratio Spread
A Ratio spread is a, multi-leg options position. Like a vertical, the ratio spread involves buying and selling options on the same underlying security with different strike prices and the same expiration date. In this spread, the number of option contracts sold is not equal to a number of contracts bought. An unequal number of options contracts gives this spread certain unique properties compared to a regular vertical spread. A typical ''ratio spread'' would be where twice as many option contracts are sold, thus forming a 1:2 ratio. Purpose Ideally, this strategy should be used when either A) the implied volatility of the options expiring in a particular month has recently moved sharply higher and is now beginning to decline, or B) the trader believes for whatever reason that the underlying market of the option(s) will move steadily in his favor during the life of the option. The trader will use call options in this strategy if they believe the underlying market will move steadil ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Implied Volatility
In financial mathematics, the implied volatility (IV) of an option contract is that value of the volatility of the underlying instrument which, when input in an option pricing model (such as Black–Scholes), will return a theoretical value equal to the current market price of said option. A non-option financial instrument that has embedded optionality, such as an interest rate cap, can also have an implied volatility. Implied volatility, a forward-looking and subjective measure, differs from historical volatility because the latter is calculated from known past returns of a security. To understand where implied volatility stands in terms of the underlying, implied volatility rank is used to understand its implied volatility from a one-year high and low IV. Motivation An option pricing model, such as Black–Scholes, uses a variety of inputs to derive a theoretical value for an option. Inputs to pricing models vary depending on the type of option being priced and the pricing m ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Delta Neutral
In finance, delta neutral describes a portfolio of related financial securities, in which the portfolio value remains unchanged when small changes occur in the value of the underlying security. Such a portfolio typically contains options and their corresponding underlying securities such that positive and negative delta components offset, resulting in the portfolio's value being relatively insensitive to changes in the value of the underlying security. A related term, delta hedging is the process of setting or keeping the delta of a portfolio as close to zero as possible. In practice, maintaining a zero delta is very complex because there are risks associated with re-hedging on large movements in the underlying stock's price, and research indicates portfolios tend to have lower cash flows if re-hedged too frequently.De Weert F. pp. 74-81 Nomenclature \Delta The sensitivity of an option's value to a change in the underlying stock's price. V_0 The initial value of the option ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Expiration (law)
In finance, the expiration date of an option contract (represented by Greek letter tau, τ) is the last date on which the holder of the option may exercise it according to its terms. In the case of options with "automatic exercise", the net value of the option is credited to the long and debited to the short position holders. Typically, exchange-traded option contracts expire according to a pre-determined calendar. For instance, for U.S. exchange-listed equity stock option contracts, the expiration date is always the Saturday that follows the third Friday of the month, unless that Friday is a market holiday, in which case the expiration is on Thursday right before that Friday. The clearing firm may automatically exercise by exception any option that is in the money at expiration to preserve its value for the holder of the option and at the same time, benefit from the commission fees collected from the account holder. However, the holder or the holder's broker may request t ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Box Spread (options)
In options trading, a box spread is a combination of positions that has a certain (i.e., riskless) payoff, considered to be simply "delta neutral interest rate position". For example, a bull spread constructed from calls (e.g., long a 50 call, short a 60 call) combined with a bear spread constructed from puts (e.g., long a 60 put, short a 50 put) has a constant payoff of the difference in exercise prices (e.g. 10) assuming that the underlying stock does not go ex-dividend before the expiration of the options. If the underlying asset has a dividend of X, then the settled value of the box will be 10 + x. Under the no-arbitrage assumption, the net premium paid out to acquire this position should be equal to the present value of the payoff. Box spreads' name derives from the fact that the prices for the underlying options form a rectangular box in two columns of a quotation. An alternate name is "alligator spread," derived from the large number of trades required to open and close th ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Bear Spread
In options trading, a bear spread is a bearish, vertical spread options strategy that can be used when the options trader is moderately bearish on the underlying security. Because of put–call parity, a bear spread can be constructed using either put options or call options. If constructed using calls, it is a bear call spread (alternatively call credit spread). If constructed using puts, it is a bear put spread (alternatively put debit spread). Bear call spread A bear call spread is a limited profit, limited risk options trading strategy that can be used when the options trader is moderately bearish on the underlying security. It is entered by buying call options of a certain strike price and selling the same number of call options of lower strike price (in the money) on the same underlying security with the same expiration month. Example Consider a stock that costs $100 per share, with a call option with a strike price of $105 for $2 and a call option with a strike price of $95 ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Iron Butterfly (options Strategy)
In finance an iron butterfly, also known as the ironfly, is the name of an advanced, neutral-outlook, options trading strategy that involves buying and holding four different options at three different strike prices. It is a limited-risk, limited-profit trading strategy that is structured for a larger probability of earning smaller limited profit when the underlying stock is perceived to have a low volatility. \mbox = \Delta(\mbox) \times (1+rt) - \mbox It is known as an iron butterfly because it replicates the characteristics of a butterfly with a different combination of options (compare iron condor The iron condor is an options trading strategy utilizing two vertical spreads – a put spread and a call spread with the same expiration and four different strikes. A long iron condor is essentially selling both sides of the underlying instrum ...). Short iron butterfly A short iron butterfly option strategy will attain maximum profit when the price of the underlying asset a ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Bull Spread
In options trading, a bull spread is a bullish, vertical spread options strategy that is designed to profit from a moderate rise in the price of the underlying security. Because of put–call parity, a bull spread can be constructed using either put options or call options. If constructed using calls, it is a bull call spread (alternatively call debit spread). If constructed using puts, it is a bull put spread (alternatively put credit spread). Bull call spread A bull call spread is constructed by buying a call option with a lower strike price (K), and selling another call option with a higher strike price. Often the call with the lower exercise price will be at-the-money while the call with the higher exercise price is out-of-the-money. Both calls must have the same underlying security and expiration month. If the bull call spread is done so that both the sold and bought calls expire on the same day, it is a vertical debit call spread. Break even point= Lower strike price ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Backspread
The backspread is the converse strategy to the ratio spread and is also known as reverse ratio spread. Using calls, a bullish strategy known as the call backspread can be constructed and with puts, a strategy known as the put backspread can be constructed. Call backspread The call backspread (reverse call ratio spread) is a bullish strategy in options trading whereby the options trader writes a number of call options and buys more call options of the same underlying stock and expiration date but at a higher strike price. It is an unlimited profit, limited risk strategy that is used when the trader thinks that the price of the underlying stock will rise sharply in the near future. A 2:1 call backspread can be created by selling a number of calls at a lower strike price and buying twice the number of calls at a higher strike. Put backspread The put backspread is a strategy in options trading whereby the options trader writes a number of put options at a higher strike price (often ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Credit Spread (options)
In finance, a credit spread, or net credit spread is an options strategy that involves a purchase of one option and a sale of another option in the same class and expiration but different strike prices. It is designed to make a profit when the spreads between the two options ''narrows''. Investors receive a net credit for entering the position, and want the spreads to ''narrow'' or expire for profit. In contrast, an investor would have to pay to enter a debit spread. In this context, "to narrow" means that the option sold by the trader is in the money at expiration, but by an amount that is less than the net premium received, in which event the trade is profitable but by less than the maximum that would be realized if both options of the spread were to expire worthless. Bullish strategies Bullish options strategies are employed when the options trader expects the underlying stock price to move upwards. It is necessary to assess how high the stock price can go and the time frame ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Strike Price
In finance, the strike price (or exercise price) of an option is a fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security or commodity. The strike price may be set by reference to the spot price, which is the market price of the underlying security or commodity on the day an option is taken out. Alternatively, the strike price may be fixed at a discount or premium. The strike price is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the market price of the underlying instrument at that time. Moneyness Moneyness is the value of a financial contract if the contract settlement is financial. More specifically, it is the difference between the strike price of the option and the current trading price of its underlying security. In options trading, terms such as ''in-the-mone ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
