Three ways to build a butterfly spread
July 18, 2017
Neutral Outlook

Three ways to build a butterfly spread

A butterfly spread is appropriate when you expect that the price of the underlying asset will remain relatively unchanged and reach a specific target price upon expiration of the options used in the strategy. The following graph illustrates such a situation with shares in BCE Inc., when their price fluctuated within a range of...

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2 years ago
Profiting from a Stock’s Relative Stability over a Given Period of Time
July 04, 2017
Neutral Outlook

Profiting from a Stock’s Relative Stability over a Given Period of Time

There are three situations in which options can be used to take advantage of changes in the price of an underlying stock: when prices rise, when they fall, and when they enter a relatively stable period. In this article, I will examine how to benefit from a relatively stable stock price. More specifically, we will look at an...

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2 years ago
Demystifying the Black-Scholes formula
June 27, 2017
Concepts

Demystifying the Black-Scholes formula

The Black-Scholes formula is an option valuation model developed by two academics, Fischer Black and Myron Scholes, who first described it in a 1973 article. The article appeared in the same year that the Chicago Board Options Exchange (CBOE) was founded, and the model effectively democratized the use of options. Previously,...

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2 years ago
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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2 years 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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2 years 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 years 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 years 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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3 years 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 years 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 years ago