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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 Bear Call Spread or Sell Bearish 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 long position prevents impact from Implied Implied Volatility.

2. Bull Call Spread

  • Also called Vertical Spread or Long Call Spread.
  • Buying a lower priced call and selling a higher priced call.
  • Selling the call is to pay for the real call. Unfortunately, the sold call also restricts upside.

3. Bear Call Spread

  • Selling a lower priced call and buying a higher priced call.
  • Shooting for the premium but limiting loss in case value shoots like crazy.

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.

5. Bear Put Spread

  • 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.

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.

7. Short Straddle

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

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.

9. Short Strangle

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

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 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.

3. Iron butterfly

  • 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.

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.