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The Greeks: Theta
Martin Noël
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...
Will Volatility Revert to the Mean?
Hans Albrecht
A crucial foundation for understanding how option volatility works is the concept of ‘mean reversion’. For a period, stocks can go up and stay up, and they can conversely go down and stay down. But option pricing will generally have trouble staying high or low for an extended length of time. So why do prices eventually move...
The Greeks: Delta
Martin Noël
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...
A Wall of Worry
Jason Ayres
There’s an old saying that “markets climb a wall of worry and slide down a slope of hope”. I think many would agree that although both U.S. and Canadian equities continue climb, there’s no shortage of apprehension when discussing how much further the markets can go with out some sort of a correction. One...
Dividend Impact on Options’ Intrinsic Value
Martin Noël
As we mentioned in earlier articles, an option’s intrinsic value is the premium value related to the difference between the stock’s price and the strike on the option. VIoa = max(S – X; 0) VIov = max(X – S; 0) In the previous article, we saw that the evolution of interest rates had an impact on the actual value...
Impact of interest rates on the intrinsic value of options
Martin Noël
The intrinsic value of an option is the value of its premium related to changes in the underlying stock’s price compared to the option’s strike price. So the intrinsic value of a call option (IVco) is the difference between the market price of the underlying (U) and the strike (X) of the call option, while the intrinsic...
Variables with an impact on the value of options
Martin Noël
You have done your homework on a stock, analyzing its fundamental and technical data, and you are bullish about its potential over the next few months. You decide to buy call options to make the most of your forecast. Over the next few weeks, the stock climbs slightly, and you see the value of your call options declining...
Selecting options expiration dates : Thêta
Montréal Exchange
Before selecting an expiration date on an option contract, it is important to review some basic concepts of option trading. Options are perishable Absolutely! Remember that the premium of an option is defined as a tangible value, determined by the relationship between the strike price and the price of the underlying stock (also...
Writing covered calls as a hedge against a slight drop in the shares of Sun Life Financial Inc.
Martin Noël
Writing covered calls as a hedge against a slight drop in the shares of Sun Life Financial Inc. As can be seen in the following weekly chart, shares in Sun Life Financial Inc. (SLF) have broken out of a range of $35 to $45 that has characterized trading since the beginning of 2014. In principle, $45 should now be a support...
Follow-up #1 – Mixed Horizontal Calendar Spread on Units of XIU
Martin Noël
In our article dated November 28, 2016, we established a mixed horizontal calendar spread on units of XIU (the iShares S&P/TSX 60 Index ETF), looking to take advantage of relatively stable prices until the options mature on December 16, 2016. Initial position as at November 25, 2016 (value as at December 16,...
