Trade Update: Taking Profits on High IV Trade

The recent high Implied Volatility in the market prompted up to place a trade that takes advantage of such conditions last week. 

If you can recall, I sold the 1800 puts with 14 days to expiration at 3.60. Well, today the IV deflated as the market climbed a little higher after last weeks sell off.

(Here's the link to the original trade)

I was able to buy the puts back at 1.15 for a profit of 2.45, or $245 dollars per contract. This put me at a profit of 68% of the total max profit. Well above my expected goal.

Here's what the current market is showing as of today:

If you look at the top left hand corner of the chart, you will see the current IV rank showing as 41%. On Friday when we placed this trade, the IV rank was around 64%. 

So over the course of just the weekend, with a shift in IV, and the right strategy, we can secure quick profits by taking advantage of situations that happen. Seeing your trade, placing it, and taking profits early are essential for keeping risk low, and profits climbing!

Stay tuned for the more upcoming trades. 

Options Trading Lesson 4: A Basic Guide to the Greeks

Since the Greeks are well, Greek to anyone reading this, I'm only going to introduce them at a basic level in this lesson. I can remember not really grasping them at first, but after some trading experience, and more in depth study they became some very useful tools for me. So without further ado, let us begin!

The names, and definitions are as follows:

• Delta: Measures the rate of change of the option value in relation to the value of the underlying asset. So in other words, it allows us to track how much the price of our option should change if the underlying asset were to go up or down in value. For example, if we own an option with a delta of 0.5, and the underlying stock goes up by $10. Then our option price should go up by $5. Keep in mind that Delta, as well as all of the Greeks are a moving target, and will be constantly changing in relation to the movement of the underlying asset.
• Gamma: Measures the rate of change of Delta in relationship with the underlying asset. So, as mentioned previously; the Greeks are constantly adjusting with the underlying asset. Gamma simply helps you see how much Delta should change in accordance with the movement of the underlying asset.
• Theta: Measures the sensitivity of the option to the value of time (Extrinsic Value). It portrays the expected amount of value decay you can expect per day with the option you bought or sold. It's what option traders refer to when they talk about "Time Decay." Time decay is an option sellers best friend, and an options buyers worst enemy.
• Vega: Measures the options sensitivity to volatility changes in the underlying asset. It helps you gauge how much value the option stands to gain or lose given a fluctuation in the current volatility environment. As you'll see, or may even know now, there are certain trades that are better suited for low volatility environments (Calendar Trades...), and other trades that are better suited for high volatility environments (Strangles, Iron Condors...).
• Rho: Measures the options sensitivity to the interest rate of the underlying. This is the Greek that is often left out, and unused as it does not have as huge an impact on the underlying as the other Greeks do.

Here is an example of what the Greeks look like in the option chain:

Well, that sums up the basics of the Greeks. Hopefully you have gained something from this lesson. There is a lot of information to learn about the Greeks, and more in depth lessons will eventually be added. In the mean time, post any comments or questions, and feel free to browse through the Lesson Archive, and the Trade Review Archive.  Cya Later :)

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Taking Advantage of High Volatility

In Response to the high Implied Volatility increase from yesterday. I decided to open a trade that takes advantage on this increase.

It's a rather simple trade. I sold the 1800 puts on SPX with 14 days to expiration. I got them for a 3.60 credit with a Delta of 9 and Theta of 50. This means that I picked up $360 per contract with a probability of the option remaining out of the money around 91%, and the Theta tells me I can expect to see the rate of decay at about $50 a day (this will increase a little every day until expiration).

Now I only added the puts because I can go further out on the put side than the call side, and I see that we have already touched the 21 week moving average for the SPX. The SPX's response to the past times it has touched this level has been to come back, and offer some resistance at this level. This doesn't mean that it can't go through, and blow my theory to smithereens, but I do trust the probability that it won't 91% of the time. Here's the chart that I was looking at:

The yellow line represents the 21 week moving average. As you can see from past dips down, the line has held. Now if we do see the SPX continue to break down, and we have a few consecutive weeks below the line. Then I would consider that a trend reversal is taking place. 

In addition, I'll be sure to update you and let you know what I do with the trade if I happen to have to make an adjustment or take it off. Generally I'll take my profits at 50%. So my goal is for theta to crush the value of the option until I see it worth around 1.80.

Options Basics Lesson 3: Intrinsic and Extrinsic Value

This Options Trading lesson is focused on Intrinsic, and Extrinsic value. Since this is a concept that some people take time to grasp, I will explain the two definitions in a couple of different ways.

First of all. What are the definitions of Intrinsic, and Extrinsic value in relation to trading Options?

• Intrinsic Value refers to the In the Money options found on the option chain. It deals with the relationship of a specific strike to the actual price of the underlying stock. For example: If you purchased the $20 call strike on XYZ, and the value of the stock increased to $30, then the Intrinsic Value of your option is $10. Note that the Intrinsic Value will never go below 0. If the math brings your Intrinsic Value below 0, then all of your strikes current value falls into the Extrinsic side.
• Extrinsic Value refers mainly to the Out of the Money options. Extrinsic Value is based on the time the option has left until expiration. These Out of the Money options tend to decay in value rather quickly over time because they lack any real value other than the probability that they will become valuable at some point in the expiration cycle. In the Money options will have both Intrinsic, and Extrinsic value, but Out of the Money options will only ever have Extrinsic value associated with them.

Another way to look at these terms is to simply look at them as Real Value vs. Time Value. When you buy or sell an option, these two factors will affect the price. An option with Real value (Intrinsic) will always have some Time value (Extrinsic) built into it, and because of this, the option is able to keep its value over time better than an Out of the Money option with just Time value. This is why it's always smart to purchase options that have real value (ITM), and to sell options that have time value (OTM), but that is a lesson for later. 

Here is a visual representation of the Option Chain with the Intrinsic and Extrinsic values for your viewing:

As you can see, Intrinsic value only relates to any strike that is ITM, but both ITM, and OTM Calls, and Puts have Extrinsic value because of the time left until expiration. 

That sums up this lesson! Next lesson will deal with the basic definitions of the Greeks. Don't forget to leave your comments and questions below.

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