OPTIONS

OPTIONS

1. DEFINITIONS

   • Generalidades OPTIONS
     • One options contract usually represents 100 shares
     • Call options: gives right (not obligation) to buy a stock at a specific price per share within a specific time frame
     • Put options: gives the right (not the obligation) to sell a stock at a specific price per share within a specific time frame
     • Strike price: pre-agreed price per share at which stock may be bought or sold under the terms of an options contract
     • In the money (ITM) = for calls: stock price is above the strike price
     • Out of the money (OTM) = for a call: stock price is below the strike price
     • Intrinsic value: the amount an option is "in the money"
     • Exercise: the owner of the option evokes the right embedded in an options contract
     • Index vs Equity options: Index options cant be excercized before expiration, Equity options CAN
     • Stop-loss order: an order to sell a stock or option when it reaches a certain price
     • Volatility: amount the stock price fluctuates, without regard for direction
       • Historical volatility: annualized standard deviation of past stock price movements
       • Implied volatility: what the market is implying the volatility will be in the future, expressed on an annualized basis
         • When IMP. V. increased, the options price increases
         • It is expressed as a percentage of the stock price indicating a one standard deviation move over the course of the year
           • Typical SD probabilities for a year
             • ONE S.D. 68%
             • TWO S.D. 95%
             • THREE SD 98%
         • EXAMPLE: STOCK X is trading at $50, implied volatility is 20%, this means there is a marketplace consensus that a one standard deviation move over the next 12 months will be plus or minus $10 (since 20% of 50 equals 10)
           • How to calculate 1 s.d. over the life of an option (that is not 12 months)
             • adjuntar formula
     • Most commonly traded options: between 30 and 90 calendar days until expiration
   • GREEKS
     • DELTA
       • DEF: The amount an option price is expected to move based on a $1 change in the underlying stock
       • Calls have a positive Delta between 0 and 1
         • If delta is 0.50, and the stock goes up $1, then the price of the call will go up $0.50
       • Puts have negative delta -1/0
       • Another definition: probability that option will finish in-the-money
     • GAMMA
       • DEF: Rate that delta will change based on a $1 change in the stock price
       • Options with highest Gamma are the most responsive to changes in the price of the underlying stock
       • Gamma decreased as value of the option moves away from the strike price
       • High gamma is good for options buyers, it's not good for options sellers
     • THETA
       • The amount the price of calls and puts will decrease for a one-day change in the time to expiration
     • VEGA
       • DEF: The amount call and put prices will change for a corresponding one-point change in implied volatility
       • Vega only affects the time value of an options price
     • INCLUDE GRAPHICS