Early Exercise of Options
May 30, 2017
Concepts

Early Exercise of Options

Holding shares in a company gives the shareholder the following rights:*The right to transfer ownership, *The right to dividends, *Voting rights, and *The right to residual income and assets. What this means is that shareholders are free to sell their shares, take dividends when they are paid, vote at shareholder meetings and...

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4 weeks ago
Call Put Parity: How to Transform Your Positions
May 17, 2017
Concepts

Call Put Parity: How to Transform Your Positions

I have been told frequently – and surely so have you – that selling cash-secured puts is a very risky strategy. Haven’t you? The main reason put forward for not using this strategy is that you could be forced to buy the security, even if the company had just gone bankrupt. In this light, the strategy rightly raises fears....

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1 month ago
Delta: Assessing Probabilities Based on the Break-even price
May 07, 2017
Concepts

Delta: Assessing Probabilities Based on the Break-even price

As we saw in an earlier article, delta measures how much an option’s price moves in relation to a change in the price of the underlying asset. Delta is a variable from the Black-Scholes option pricing model, and it is also used in the industry as an approximation of the probability that the option will be in-the-money at...

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2 months ago
Purchasing Put Options or Selling Call Options to Protect Oneself? (Third and Last Part)
May 02, 2017
Concepts

Purchasing Put Options or Selling Call Options to Protect Oneself? (Third and Last Part)

In the two previous articles, we compared purchasing put options as a protective strategy with selling covered call options. The first article used options with monthly expirations, and the second article used options expiring after our period of analysis, from April 17, 2015 to January 22, 2016. In both cases, the analysis led...

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2 months ago
Purchasing put options or selling call options to protect oneself? (Part 2)
April 20, 2017
Protection

Purchasing put options or selling call options to protect oneself? (Part 2)

In the last article, we compared purchasing put options with selling call options. We reached the conclusion that, in the absence of a known target price and timeframe, it is better to use strategies that take advantage of the decaying time value of options, such as selling call options, as protection against a decline in the...

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2 months ago
Purchasing put options or selling call options to protect oneself?
April 11, 2017
Bearish Outlook

Purchasing put options or selling call options to protect oneself?

Is it better to purchase put options or to sell call options for protection against loss? Many investors ask this question but, in this as in many areas, there is no single right answer. As we have seen in earlier articles, purchasing options has one major disadvantage: the erosion of the time value that must be counterbalanced...

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3 months ago
The Greeks – Vega
April 05, 2017
Concepts

The Greeks – Vega

This week, we will look at another Greek variable, called vega. Vega measures the amount that an option contract’s price changes in response to a change in the volatility of the underlying asset. You will recall that an option’s time value is influenced by the time remaining until expiration and by the implied volatility of...

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3 months ago
The Greeks: Theta
March 28, 2017
Concepts

The Greeks: Theta

This week, we will look at another Greek variable: theta. Theta measures the change in the price of an option following a change in the time remaining to its expiration. You will recall that an option’s premium has two components: intrinsic value and time value. But since an option that has reached expiration has run out of...

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3 months ago
The Greeks: Gamma
March 23, 2017
Concepts

The Greeks: Gamma

Our last article showed how delta could help predict the future value of options following a change in the price of the underlying asset. We also learned that delta gives an indication of the equivalent stock position (ESP) on the underlying asset. Gamma Gamma measures the change in the value of delta relative to a change in...

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3 months ago
The Greeks: Delta
March 17, 2017
Concepts

The Greeks: Delta

In the last few articles, we have seen that there are several variables that have an impact on the value of options. This table illustrates how an increase in one of the variables affects the values of call and put options. As you can see, with all other things being equal, when one of the variables moves, we should expect the...

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3 months ago