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13 Cards in this Set
- Front
- Back
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Hedge Ratio (Delta) |
Hedge Ratio sometimes known as Delta. It can be used to determine how many options are needed to hedge a share of stock. This makes it useful for many different types of strategies. Puts have negative delta’s. $1increase in stock price = current option price + delta $1 Decrease in stock price= current option price - delta |
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Hedge Ratio Example |
Call Option: $5.00 Delta: +0.75 *If the strike price increases by $1, the $5.00 option is expected to increase by $0.75 to$5.75. *If the stock option prices decreases by $1, the $5.00 option is expected to decrease by $0.75 to $4.25. $5.00 call+ $0.75 delta= $5.75 option price Put Price: $3.00 Delta: -0.25 *If the stock price increases by$1 the $3.00 option is expected to lose $0.25 and be worth $2.75. *If the stock price falls by $1, the $3.00 option is expected to increase by $0.25 and be worth $3.25. $3.00 put +(-) $0.25 delta=$2.75 option price |
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Gamma |
Tells how fast the delta changes. If gamma is high and the price of the underlying asset moves against you, then your option value will fall fast. It’s an important number to manage risk. In mathematical terms gamma is the second derivative, or the rate of the rate of change. |
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Gamma Explained |
If the gamma is 0, the price won’t change much if delta changes. This happens if the option is deep in the money ( so any price change in the underlying asset will affect the price of the option one- to - one) or if the option is so far out of the money the value of the underlying is almost irrelevant. At the other extreme, a gamma of 1 indicates the delta will change really fast when the underlying asset changes price, so the price of the option will change quickly, too. Delta tells you how much an option moves, and gamma tells you how fast it’s moving. Gamma is used in risk management more than it is in actual trading. Someone looking to manage risk needs to know how quickly a given a situation could move in the wrong direction. To prevent an options contract from going to 0 should pay attention to the gamma of their open option position. Traders should close out their positions if the gamma becomes to large for comfort. |
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Gamma Explained |
The gamma will be greatest when the option is in the money, which you may remember is the point at which the price of the underlying asset is the same as the strike price of the option. As the option moves out the money ( where it is not profitable to exercise) , the gamma will be smaller. The greater the gamma , the faster an option price will change when the underlying price changes. Delta tells you how much an option moves and gamma tells you how fast it is moving. |
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Option Cycle (Expiration Cycles) |
The traditional schedule of expiration dates for a single option. Most options are written for periods that are multiples of 3 months, but not all options expire on the same month’s. The option cycle is the pattern of months on which options contracts expire. |
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Put-Call Ratios for Single-Stock Equity Options |
If the Ratio is… 0.75 or high it is Bearish 0.40 to 0.75 is Neutral 0.40 or lower is Bullish |
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Put-Call Ratio For Index Options |
If the Ratio is… 1.50 or Higher is Bearish 0.75 to 1.50 is Neutral 0.75 or Lower is Bearish |
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Put-Call Ratio Explained |
If people are negative on a stock, they will want to buy put options in order to see if they can make a profit on the decline. If they think the stock is going up, they will buy call options. Some buyers and sellers are acting without information, while other buyers and sellers are market makers and hedgers. There will always be both puts and calls outstanding on any underlying asset. A big change in the put-call ratio could signal a change in sentiment signaling an upcoming price move. Traders tend to look at changes in the put-call ratio rather than absolute the level. They also look for information explaining why the ratio is changing. A change that is driven by the institutional investors who are hedging is viewed as more important than a change driven by retail customer volume. This difference is because retail speculators tend to be overly emotional in their trading. Put- Call Ratios can be calculated differently, depending on what’s being measured. The put-call ratio for one particular individual underlying asset is a way to measure sentiment for that asset, which may have nothing to do with sentiment for the broader market. A look at the put-call ratio for the entire market, or for a section of it, provides information about how bullish or bearish sentiment is for a broader market. Some traders look at the put-call ratio for index options to get a quick read on the overall market. You may see this metric used many ways to gauge sentiment. Each day, the stock exchanges publish put-call ratios for the exchanges as a whole as well as put-call ratios for different types of options. |
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Parity |
Is the point at which an option is in the money and has no time value, which occurs immediately before expiration |
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Intrinsic Value |
The value that could be derived if the option contract were to be exercised immediately by the buyer |
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Volatility |
The fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of return. |
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Time Decay (Erosion) |
A term used to describe how the time value of an option can “decay” or reduce with the passage of time. |
