volatility arbitrage with options

London Traders and

Investors Club

Options Trading and

Volatility Arbitrage

Introduction1 ) DEFINITIONS AND BASIC

STRATEGIES

2) COMPLEX STRATEGIES

3) GREEK LETTERS

4) Q & A

CALL/PUT OPTIONS

THE BUYER /SELLER HAS THE RIGHT (BUT NOT THE OBLIGATION) TO BUY / SELL A SPECIFIED QUANTITY OF A SECURITY AT A SPECIFIED PRICE (STRIKE PRICE) WITHIN A FIXED PERIOD OF TIME (EXPIRATION)

TYPES OF OPTIONS

AT THE MONEY

STRIKE PRICE OF THE OPTION

=UNDERLYING ASSET PRICE

TYPES OF OPTIONS

IN THE MONEY

UNDERLYING ASSET PRICE IS ABOVE / BELOW

STRIKE PRICE OF THE OPTION

TYPES OF OPTIONS

OUT OF THE MONEY

UNDERLYING ASSET PRICE IS ABOVE / BELOW

THE OPTION’S STRIKE PRICE

Long Call

Short Call

Long Put

Short Put

Complex Strategies

Long Strangle Construction

BUY 1 OTM CALL

BUY 1 OTM PUT

Long Strangle

SIGNIFICANT VOLATILITY OF THE UNDERLYING ASSET EXPECTED IN THE NEAR TERM

Long Strangle

Short Strangle Construction

SELL 1 OTM CALL

SELL 1 OTM PUT

Short Strangle

LITTLE VOLATILITY IN THE UNDERLYING ASSET EXPECTED IN THE NEAR TERM

Short Strangle

Long Straddle Construction

BUY 1 ATM CALL

BUY 1 ATM PUT

Long Straddle

SIGNIFICANT VOLATILITY EXPECETED IN THE NEAR TEARM

Long Straddle

Short Straddle Construction

SELL 1 ATM CALL

SELL 1 ATM PUT

Short Straddle

LITTLE VOLATILITY EXPERIENCED BY THE UNDERLYING IN THE NEAR TERM

Short Straddle

Butterfly Spread Construction

BUY 1 ITM CALL

SELL 2 ATM CALLS

BUY 1 ATM CALL

Butterfly Spread

THE UNDERLYING ASSET IS EXPECTED NOT TO FALL OR RISE MUCH BY EXPIRATION

Butterfly Spread

Greek Letters

THETA1) IT MEASURES THE SENSITIVITY

OF AN OPTION TO TIME DECAY

2) IT TELLS HOW MUCH MONEY THE OPTION PRICE WILL LOSE FOR EVERY DAY THAT PASSES

THETA

THETALONG POSITION = YOU WANT NEGATIVE

THETA VALUES

SHORT POSITION = YOU WANT POSITIVE THETA VALUES

Delta IT MEASURES THE

SENSITIVITY OF AN OPTION TO UNDERLYING ASSET PRICE MOVEMENTS

Delta

DeltaCALL OPTIONS HAVE POSITIVE DELTAS

(0;1)

PUT OPTIONS HAVE NEGATIVE DELTAS (-1;0)

Delta IF THE DELTA OF A CALL

OPTION IS 0.75 IT MEANS THAT FOR EVERY 1 POINT MOVEMENT IN THE UNDERLYING ASSET THE OPTION PREMIUM WILL INCREASE BY 0.75

VEGA PROBALY THE MOST IMPORTANT

GREEK

IT MEASURES THE SENSITIVITY OF AN OPTION TO THE UNDERLYING ASSET VOLATILITY FLUCTUATIONS

Vega

VegaIF YOU SHORT A CALL / PUT = YOU

WANT LOW VEGA VALUES

IF YOU LONG A CALL / PUT = YOU WANT HIGH VEGA VALUES