circuit-racer

Are you trying to simplify my explanation or elaborate? I was focusing mainly on short calls because that was what I brought up in my previous post.

The Delta always changes on price action yes, but the day you bought it and the Delta given should correlate with a one day move. The Delta will constantly change based off of several variables like, as you mentioned time value or Theta. Trading weekly options will give you a Theta which will be higher than a typical 1 month option for ex. the aapl call I showed had a Theta of -.55 which is close to -.100 meaning the time value will erode very quickly based on 6 days to expiration and there isnt a lot of time value left. The Gamma and Vega also effect the Delta each day depending on volatility and price action.


Small change in price is what? I wouldnt say this is a totaly accurate statement and varies on the actual strike and trade overall.

Are you looking online at definitions or are you experienced trading options? Im just curious and Im not trying to offend you.

magician

Elaborate a bit.

It depends on gamma, of course. If the price of the underlying changes, say, 1%, I'd expect that delta would give a good approximation to the change in the option price (unless gamma's whacking big). It will depend on how close the strike price is to the spot price of the underlying, and how close the option is to expiration. An at-the-money option close to expiration will have a huge gamma, so even a 1% price change in the underlying could lead to a big change in delta and, therefore, a big difference between the actual price change of the option and that predicted by the original delta.

If gamma is small (say, for options that are either far in the money or far out of the money), so that delta doesn't change much with a change in the price of the underlying, then delta (by itself) will give a good approximation to the option's price change (similar to using duration but not convexity to approximate a bond's price change when YTM changes). If gamma is large - for example, with an at-the-money option near expiration - then delta by itself won't give a good approximation to the option's price change when the price of the underlying changes. Also, as you suggest, there may be supply and demand considerations that could push an option's price away from its theoretical (intrinsic plus time) value.

Neither. Although I've never traded options (sounds too much like work), I've studied options for many years, and have taught finance - including all sorts of derivatives (options, futures, forwards, swaps) - for several years. I used to model mortgage-backed securities (pass-throughs and CMOs) at PIMCO.

No offense taken.

I wasn't trying to offend you, either. I simply figured that a more detailed explanation (with pictures - I love pictures!) might help the other readers here.

circuit-racer

Pimco, very nice.

I figured you were feeling me out a bit which I understand after I saw you were a Moderator .... Bonds, yield to maturity, cmos, ughhhh reminds me of the 65, not my favorite topics but they def. have their place.

I was glad to see you had a good understanding of how things work. I trade options but much more complex strategies than we spoke of and can say that theory in some cases is theory.

I hope some people grasped a litle bit of what we discussed!

If I was still at work I could post some fun pics of the probability of expiring profitably...I always enjoy showing why a condor is called a condor (Iron condor that is).

magician

I really wasn't trying to feel you out a bit. I read what you wrote and simply felt that some people here might want a bit more detail. The more you're around here, the more you'll learn how the group works.

My background's mathematics, so this stuff comes pretty naturally.

I teach review courses for all three levels of the CFA exams, and at Level III we talk about quite a few option strategies. I haven't come across an iron condor (nor an iron butterfly), however, but the idea seems straightforward.

I'm sure that many did.

Please do when you get a chance.

buimonster

alcoa(AA) looking like a buy below $16? opinions? want to pull the trigger soon

circuit-racer

I would watch AA for around 15-15.50 and if it can hold that support then maybe. I would want some type of reversal on it which is not right now.






Magician:

I had a couple mins today to put an Iron Condor example up. I sold an IWM 84/85 call spread and an 80/79 put spread for a .59 cent credit.


The image below resembles a condor



Probability





Back to my original example:

We had a delta of .38 which has now changed to .44

AAPL went from $328.41 when I wrote that up to $331.85 today ($3.44 move) .38 x $3.44 = $1.31 worth of option premium. It ended at $5.85-$6.10 so close to what the Delta implied but with the Theta moving to -.94 from -.55 we are losing what time value is left which is why it wasnt around $6.20-$6.30 on this move. Pretty close to what I projected though originally.

magician

I take it you're a technical analyst at heart.

magician

That first graph is just what I expected.

I'd like a little more explanation on the second graph. I'm not sure what the axes represent so it's hard to decipher.

Do you know what gamma was originally?

What is it now?

circuit-racer

Gamma is .02 for both days, the Vega went from .14 to .17 today.

I was mentored by a great technical analyst who I ended up clashing with...paralysis by analysis gets old. I only use it for short term trends and trades mainly and just use it as one of the many research tools.

I believe a technical analyst can make almost any chart look like its going to do what they think.

How many fibonacci retracements havent happened when they were expected? But how many have?


There is too much data to say technicals are just coincidence but Im deff. not a technical guy only...charts are fun though!


Those pictures really got compressed after I uploaded them here. The probability chart is skewed because I left the probability range at 80% because thats what I would want as a probability of expiring. So for this example the probability is below 80% that the trade will expire worthless which isnt what I would want for a condor. The probability it would expire with a profit is right around 40% total. If you look at the second column labeled may 11 you can see where it takes into account the call side first at 18.43% that the IWM is between $82.04-$84.60 and $82.04-$79.41 is 19.65%. This takes into account the .59c credit which is why it goes into the 84 strike to 84.60 and down through the 80 strike to $79.41. Those would actually be break even numbers so really the percentage on this trade would be slightly below 40%.

I can leave the probability at 80% like I have and set any trade up to see if its close to having that probability of expiration. What I would look at next would be the risk/reward on the trade, if you get 80% probability then you might only get a .20c credit or .30 etc so overall the trade wouldnt make sense with a max loss of .70-80c per share. I look for a closer to 1 to 1 risk reward ratio on the trades which is very hard to get unless there is a lot of volatility or you are at or in the money.

Jim Reichard

Thanks for the replies.I will be selling 50 percent this week.

On another matter I have stock in a small oil company Transatlantic Petroleum TAT. Is it possible to leverage a small company like this that doesn't have much trading volume? I am in no way suggesting anyone buy this stock.