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Options Cheatsheet with Greeks

Options Cheatsheet with Greeks

Option basics explained

1. Open Interest

  • How many options exist in totality.

2. Implied Volatility

  1. Represents the expected volatility of the price of the stock.
  2. Used as a proxy of market risks.
  3. Increases when bearish, declines when bullish.
  4. Directly proportional to the demand of the asset, time left for option expiry.

Option Volatility Vs Stock/Index Valuation for picking strategies

  1. When valuation is under priced than there is scope of price coming up by buying.
  2. When valuation is Fair priced than there is scope of price coming to a range bound.
  3. When valuation is Over than there is scope of price coming down by selling.

Above compared to Volatility or IV we can plan strategies

For example when IV is high and option prices are high and price outlook is bearish with price over valued then its best to go with Sell side strategies Bear Call Spread or Sell Bearish outlook related strategies like Naked Calls or Call Backspreads.

And if IV is low and option prices are low and price outlook is bullish with price under valued then its best to go with Buy side strategies Bull Call Spread or buy bull outlook related strategies like Naked Calls or Call Backspreads.

Option Greeks

Vega – Measures Impact of a Change in Volatility

Theta – Measures Impact of a Change in Time Remaining

Delta – Measures Impact of a Change in the Price of Underlying

Gamma – Measures the Rate of Change of Delta

3. Delta

  • The amount by which the value of the option moves for every rupee movement in the underlying.
  • The more “In the money”, the more is the delta. “At the money” deltas are 0.5.

4. Gamma

  • The amount by which the Delta changes for every rupee movement in the underlying.
  • Gamma increases as you get close to expiry.

5. Theta

  • The amount by which the value of the option drops per day.
  • Theta increases as you get close to expiry.

6. Vega

  • The amount by which the value of the option moves for every 1% change in Implied Volatility of the underlying.
  • The price of the option goes up when volatility goes up.
  • Vega is higher the further out the option is from expiry. Vega is higher the closer the option is to being “At the money.”

Influences on a short and long call option’s price
Call Options

Call options                         Increase in Volatility  Increase in Time to Expiration Increase in the Underlying
Long                                                   +                                       +                                                              +
Short                                                   –                                        –                                                                 –

Influences on a short and long put option’s price
Put Options

Put Options                          Increase in Volatility  Increase in Time to Expiration Increase in the Underlying
Long                                                    +                                          +                                                              –
Short                                                    –                                           –                                                              +

Simple Naked Options (Beginners / Simple)

1. Long Call

  • “Buying to open” a long call gives the right but not the obligation to purchase a stock at a predetermined price on a predetermined date.
  • The hope is the stock appreciated in value.

2. Short Call

  • “Selling to open” a short call obligates a trader to sell shares of a stock at a predetermined price on a predetermined date, assuming the short call is in the money.
  • The hope is the option doesn’t get exercised so the trader can keep the premium and not give any stocks in exchange.
  • Exact opposite of a long call.

3. Long Put

  • “Buying to open” a long put option gives the right but not the obligation to sell an underlying asset as a specific price at a specific date in the future.

4. Short Put

  • “Selling to open” or selling a put contract means you take on the obligation of having to buy an underlying asset at a specific price in the future.
  • Use this to buy stocks especially during high volatility.

5. Covered Call

  • Buying 100 stocks AND selling a call of the same stock.

6. Protective Put

  • To protect yourself from downside in a stock you own. Buy a Put. You lose the premium if nothing happens but safeguard your investment.

Option Strategies  2 contracts (Beginners to Intermediate)

1. Synthetic Long

  • Buying a call and selling a put in the same price and time frame.
  • When you want to own the stock at the price, whether it does down or up. The hope is it goes up though.
  • This is done to mimic owning the stock. The movement is similar to that. One short and one longposition prevents impact from Implied Implied Volatility.

2. Bull Call Spread

  • Also called Vertical Spread or Long Call Spread.
  • “Bull” because we are expecting the stock price to stay flat or go up. “Call” because it’s made up of calls.
  • Buying a lower strike call and selling a higher strike call.
  • Selling the call is to pay for the real call. Unfortunately, the sold call also restricts upside.
  • below example we are buying 16900 lower strike Call and selling 17200 higher strike Call.
  • overall outlook is bullish that is when spot price moves up we make money.

Bull Call Spread Greeks effect explained:

  1. Positive on Delta which means price goes up as we are in call we make money.
  2. Theta is controlled now where time decay is not as much as Naked options. (1/5th nearly)
  3. Vega effect is controlled/neutral nearly as well and its positive as in Buy side where increase in volatility will give us profits slightly.

3. Bear Call Spread

  • “Bear” because we are expecting the stock price to stay flat or go down. “Call” because it’s made up of Calls.
  • Selling a lower stike call and buying a higher stike call.
  • Shooting for the premium but limiting loss in case value shoots like crazy.
  • Below example we are selling lower strike 16900 call and buying higher strike 17250 Call.
  • overall outlook is bearish that is when spot price moves down we make money.

Bear Call Spread Greeks effect explained:

  1. Negative on Delta which means price goes down as we are in put we make money.
  2. Theta is controlled now where time decay is not as much as Naked options. (1/5th nearly)
  3. Vega effect is controlled/neutral nearly as well and its negative as in Sell side where increase in volatility will give us loss slightly and profits on volatility decrease.

4. Bull Put Spread

  • Sell a put option and buy an even lower priced put option.
  • Lower priced option is to hedge in case the market does really bad.
  • “Bull” because we are expecting the stock price to stay flat or go up. “Put” because it’s made up of puts.
  • below example we are selling 16900 lower strike Put and buying even lower 16550 higher strike Put.
  • overall outlook is bullish that is when spot price moves up we make money.

Bull Put Spread Greeks effect explained:

  1. Positive on Delta which means price goes up as we are in put sell side we make money.
  2. Theta is controlled now where time decay is not as much as Naked options. (less than 1/10th)
  3. Vega effect is controlled/neutral nearly as well and its negative as in sell side where increase in volatility will give us loss slightly and decrease will profits.

5. Bear Put Spread

  • “Bear” because we are expecting the stock price to stay flat or go down. “Put” because it’s made up of puts.
  • Buy a put option and sell an even lower priced put option.
  • Selling the even lower priced put options limits profits but also downside potential.
  • below example we are buying 16900 lower strike Put and selling even lower 16550 strike Put.
  • overall outlook is bearish that is when spot price moves down we make money.

Bear Put Spread Greeks effect explained:

  1. Negative on Delta which means price goes down as we are in put we make money.
  2. Theta is controlled now where time decay is not as much as Naked options.(less than 1/10th)
  3. Vega effect is controlled/neutral nearly as well and its positive as in Buy side where increase in volatility will give us profits slightly.

6. Long Straddle

  • Buy a call and put for the same strike price and date.
  • Useful during times of high volatility. You’re expecting some movement but don’t know what direction.

Long Straddle Greeks effect:

  1. Please notice Theta is now double that is time decay is double and negative(we loose money as time decay happens) of what is for each option separetely.
  2. Vega/Volatility increase will have positive impact.
  3. Delta is near neutral and positive where we make money when price spot moves on either side drastically. ( around news like RBI New release is good time to try this strategy)

7. Short Straddle

  • Selling call and put for the same strike price and date.
  • Expecting no movement in the stock price.

Short Straddle Greeks effect:

  1. Please notice Theta is now double and positive(we make money as time decay happens) that is time decay is double of what is for each option separetely.
  2. Vega/Volatility increase will have negative impact.
  3. Delta is near neutral and negative where we make money when price spot does not move on either side drastically. (period of consolidation)

8. Long Strangle

  • Buying a call and a put at different prices for the same time.
  • You’re expecting a huge movement and risking little money as the strike prices are far apart.

 

Long Strangle Greeks effect:

  1. Please notice Theta is now double that is time decay is double and negative(we loose money as time decay happens) of what is for each option separetely.
  2. Vega/Volatility increase will have positive impact.
  3. Delta is near neutral and slightly negative where we make money when price spot moves on either side drastically beyond strike prices for Call and Put. ( around news like RBI New release is good time to try this strategy)
  4. Less Capital requirement compared to Long Straddle

9. Short Strangle

  • Selling a call and put at different prices for the same time.
  • Works best when there’s little movement.

Short Strangle Greeks effect:

  1. Please notice Theta is now double and positive(we make money as time decay happens) that is time decay is double of what is for each option separetely.
  2. Vega/Volatility increase will have negative impact.
  3. Delta is near neutral and negative where we make money when price spot does not move on either side drastically beyond the Call and Put strike prices. (period of consolidation)
  4. Lower capital needed compared to Short Straddle.

10. Calendar spread with calls

  • Also know as time spread
  • Selling a short term call and using that money towards buying a long term call at the same price.
  • Looking for the stock to go higher but not immediately. The hope is that the short term call expires.

11. Calendar Spread with Puts

  • Selling a short term put to use proceeds to buy a long term put at the same price.

Option Strategies with more than 3 contracts (Advance option strategies)

1. Call Backspread

  • Sell at-the-money call option and use that money to buy a lot of out-of-the-money call options.
  • Hoping for a very large upward swing by with a conservative approach.

2. Iron Butterfly

There are both Short Iron butterfly and Long Iron Butterfly.

Short iron Butterfly is

  • Selling a bear call spread and a bull put spread aka straddle with extreme protection with single strike price.
  • You’re expecting stock price movement only within the ranges and betting on volatility drop.

Short Iron Butterfly Greeks effect :
  1. Delta is near neutral and we do not want price to move in any direction
  2. Theta is positive and we profit from theta decay
  3. Negative Vega that is increase in vega is converted to loss for this strategy.

Long iron Butterfly is

  • Buying a Bull call spread and a bear put spread aka straddle with extreme protection with single strike price.
  • You’re expecting stock price movement to go beyond the ranges of both strikes and betting on volatility increase.

Long Iron Butterfly Greeks effect :
  1. Delta is near positive and we want price to move in any direction away from ATM.
  2. Theta is negative and we make loss from theta decay
  3. Positive Vega that is increase in vega is converted to profit for this strategy.

3. Iron Condor

  • Selling a bear call spread and a bull put spread aka straddle with extreme protection.
  • You’re expecting stock price movement only within the ranges and betting on volatility.

There are both Short Iron Condor and Long Iron Condor.

Short iron Condor is

  • Selling a bear call spread and a bull put spread aka straddle with extreme protection with single strike price.
  • You’re expecting stock price movement only within the ranges and betting on volatility drop.

 

Short Iron Condor Greeks effect :
  1. Delta is near neutral/negative and we do not want price to move in any direction
  2. Theta is positive and we profit from theta decay
  3. Negative Vega that is increase in vega is converted to loss for this strategy.

Long iron Condor is

  • Buying a Bull call spread and a bear put spread aka straddle with extreme protection with single strike price.
  • You’re expecting stock price movement to go beyond the ranges of both strikes and betting on volatility increase.

Long Iron Condor Greeks effect :
  1. Delta is near positive and we want price to move in any direction away from ATM.
  2. Theta is negative and we make loss from theta decay
  3. Positive Vega that is increase in vega is converted to profit for this strategy.

4. Diagonal Spread with Calls

  • Buying a long term call at a lower strike price and selling a short term call at a higher strike price.
  • Keep selling short term calls under the protection of the purchase of the single long term call.

5. Diagonal Spreads with Puts

  • Burying a long term put and selling short term Puts with an even further lower strike price.

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