Options Foundation – Time Decay, Implied Volatility, Greeks – Hari Swaminathan
- Basic knowledge of Call Options and Put Options
- If you’ve not taken the Options Call and Put Options race, you can find it.
SECTION I – TIME DECAY
Time decay is a pivotal component of Options Strategies. In fact, time decay alone is responsible for the majority of advanced option strategies. In this part of the race, we are going to study the concept in detail. Options are “wasting” assets, and they lose value every day. The buyer gets hurt from time decay and the seller benefits from it. And time decay is becoming more exponential. It is also the great equalizer between the profiles of a buyer and seller of Options. Time decay is the great equalizer in the risk / reward profiles of buyers and sellers of Options. Several intermediate and advanced strategies are based on selling the premium (option sellers) and these positions make a profit due to time decay in the value of these options over a period of time.
What you will master
- What is time decay and how does it benefit Option sellers
- A complete recap of buyer and seller
- Why does not the seller have the options?
- Why is the best option between buyers and sellers?
- Apply the concept of time to our real world examples
- How can we observe Time in Options in the financial markets
- Demonstration of time decay using AAPL Options
SECTION II – IMPLIED VOLATILITY AND OPTIONS PRICES
Implied Volatility is the “wildcard” in Option prices. Ignore it, and you will pay a price. In fact, it’s so important we have at least four different varieties – Volatility, Implied Volatility, Historical Volatility, and Future or Expected Volatility. We use the real-world examples to explain the concept of Volatility in simple terms. Then we study how Volatility is quantified in Stocks and Options. And how Volatility finds a back-door. Implied Volatility considerations are critical when choosing between buyer and seller profile. NFLX and CAT options that we should make it clear that this is all about.
What you will master
- How are Option prices?
- Why is it difficult to calculate or determine? Implied Volatility of an Option
- Why is it called “implied” Volatility
- How Does It Involve Volatility?
- Why is it the “wildcard” in Option prices
- Understand a real world example of Volatility
- What is the relationship between Option prices and Implied Volatility
- How should I buy and sell at Implied Volatility?
- Are some strategies better for high volatility situations
- How We Can Observe Implied Volatility In Real Option Prices
SECTION III – GREEKS, DELTA, GAMMA, VEGA, THETA OPTION
If you’re the pilot of an aircraft, the Greeks are your instrument panel. If you do not manage your instrument panel properly, well … you get the picture. Understanding the Greeks are absolutely critical to every option position. Greeks – Delta, the king of all Greeks. Gamma – the silent operator. Theta – every Option seller’s dream. And Vega – Watch out for this one .. Options tend to ignore the Greeks. Master the Greeks and you’ll shave off months of learning curve. Not to mention, you can fly your aircraft on “auto-pilot” (with help from the Greeks).
What you will master
- The oven Greeks that govern
- How to have individual impacts
- Why is the king of all Greeks
- What do we mean by directional risk
- How does each Greek affect a buyer and a seller of Options?
- Why the Greeks are critical to understanding your Option position
- How the Greeks impact the choice of “moneyness” and expiry series
SECTION IV – MARKET OPTIONS STRUCTURE, TERMINOLOGY, MARKET MAKERS AND MORE
The Options market has a number of terms that we need to be aware of. Starting with terminology differences like “Long” and “Short”, we look at all the details that go into the Options market. We explain the important processes like Exercise and Assignment, Expiry series, Bid-Ask spreads, Brokerage and transaction costs and various other details. What is Open Interest and Why is it important, and what is the role of a Market Maker. We study the different types and make them more important for the average investor. We also discuss Regulation Margin as it applies to Options as well as Portfolio margin.
What you will master
- What does Open Interest tell us about
- What is Exercise and Assignment
- What can Open Interest tell us about general feeling about the stock
- What are the different types and which ones are the best
- What is the role of Market Makers on the Exchange Options?
- Marginalized margin and what is margin margin
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