Guide to Investing Options [Options Clearing Corporation]

1. Basics: When you purchase an option --> Long position 
    Write an option --> Short position 

2. Set your Strategy 
    - Want more Income --> write Covered Calls
    - Protect the value of the stocks that you own 
                   - Purchase Puts
                   - Purchase options on an Index that tracks the type of stocks in my portfolio 
the more time until expiration, the higher the option premium, because the chance of reaching strike price is greater 

Volatility Skew Information

Volatility Skew
- situation where individual options on a particular entity have different implied volatilities that form a pattern 
- the pattern can be a positive or negative skew

Positive Skew (forward skew)
- higher strikes, higher IV

Negative Skew (reverse skew)
- lower strikes, higher IV 

Horizontal Skew
- long term options with lower IV
- because longer term options have uncertainty of future news


If skew is (+) and IV is Low Percentile --> Put Backspread
If skew is (+) and IV is High Percentile --> Call Ratio Spread
If skew is (-) and IV is Low Percentile --> Call Backspread
If skew is (-) and IV is High Percentile --> Put Ratio Backspread



Credits: https://www.optionstrategist.com/blog/2013/03/volatility-skew-information

About our Volatility Data - Implied Volatility and Historical Volatility

Estimate of the volatility of the underlying stock

Low implied volatility --> Option considered cheap 

Don't blindly buy or sell based on Implied Volatility. There may, in fact, be a good reason why the options are expensive. Perhaps the company is involved in a major litigation, or it is a biotech company that has a major drug up for review before the FDA. Conversely, if options are very cheap, perhaps the company has agreed on an all -cash buyout. 


Index Symbols begin with $

Futures Symbols begin with @


Credits: https://www.optionstrategist.com/products/category/free-analysis-tool

Covered Call Writing: Why Cash- Base Put Selling is Superior

Naked Put Selling = Covered call writing (but naked is better strategy due to lower cost)

Covered call requires 2 commissions (stock and written  call). If you want to sell, it will be another round of commissions.

Naked Put - expires worthless


Credits: https://www.optionstrategist.com/blog/2012/11/covered-call-writing-why-cash-based-put-selling-superior

Put - Call Ratios

The trading volume of put options to call options indicates the Investor Sentiment

How to interpret put-call ratio:
- higher ratio: time to sell
but some see it as a Contrarian Indicator



Credits: https://www.optionstrategist.com/blog/2012/11/about-put-call-ratios

Which Option To Buy: Deciding What Contract Is Best

(i) Day Trading

- Uses the underlying instrument with the highest possible delta (trade the stock, NOT the option)

(ii) Short term Trading (1 to 2 weeks)

- Can buy short term

- In-the-money option

- Large delta (respond closely to the movement of the underlying)

(iii) Intermediate term Trading

- Can use lower delta due to longer trading period

- Large moves might happen due to longer trading period

- trade at-the-money option

(iv) Long Term Trading

- use even lower delta

- at-the-money option

- LEAPS option

Credits: https://www.optionstrategist.com/products/category/free-analysis-tool

Options Trading Glossary

Backspread	Any spread in which in-the-money options are sold and a greater quantity of out-of-the-money options are bought. In a more general sense, it may refer to any strategy that makes money when the market becomes volatile.
Bear spread	A spread which makes money if the underlying stock or future declines in price. Typically constructed by buying puts at one strike and selling a like number of puts with a lower strike
Bull spread	A spread which makes money if the underlying stock or future rises in price. Typically, one would buy calls at a certain strike and sell the same number of calls at a higher strike.
Calendar spread (time spread)	A spread in which one sells options at one strike and buys options at a longer maturity with the same striking price. In a neutral calendar spread, one would not necessarily buy and sell the same quantity of options. The spread may be constructed with either puts or calls, but they are not mixed; that is, if one buys calls, he also sells calls to complete the spread -- puts would not be involved in that case.
Call Calendar Spread	buy long term call + sell equal no. of near month at-the-money calls of the same underlying at the same strike price
	why? --> sell time. We hope that Price remains unchanged at expiration
Bull Calendar Spread	if you are bullish --> sell near month calls
Neutral Calendar Spread	if you are neutral --> sell near month call
Put Calendar Spread	replicate with puts
Covered Option	covered means you have an offsetting position in that underlying security
	written calls means covered by long stock
	written puts means covered by short stock
Beta	A measure of how a stock’s volatility changes in relation to the overall market. A beta may help you determine how closely a stock in your portfolio tracks the movement of an index, if you’re considering hedging with index options. A beta of 1.5 means a stock gains 1.5 points for every point the index gains—and loses 1.5 points for every point the index loses.
Alpha	A measure of how a stock performs in relation to a benchmark, independent of its beta. A positive alpha means that the stock outperformed what the beta predicted, and a negative alpha means the stock didn’ t perform as well as predicted.
Delta	The amount by which an option's price will change if the underlying security moves one point in price. See also 'position delta'.
	The general rule is this: the shorter-term the strategy, the higher the delta should be of the instrument being used to trade the strategy. (more movement)
	ie. Delta increase as you get closer to expiration for near or at the money options
Gamma	The amount by which the delta will change when the underlying stock moves by one point. See delta.
Theta	Theta is a way to measure the impact and exposure of the passage of time on an option’s price.
	In theory, theta represents how much an option’s premium may decay per day or week with all other market factors and variables remaining the same.
	Theta is generally expressed as a negative number, and reflects the amount by which the option’s value will decrease every day.
Vega	A term to describe the amount by which an option's price will change for a 1 percent change in the volatility of the underlying security.
Rho	Rho is a value intended to measure an option contract’s sensitivity to interest rate changes.
	It is a way to assess the potential change in an option’s value given a change in interest rates.
	Rho and interest rate changes have the strongest impact on longer-term options.
	most traders agree that rho has less of a measurable impact on option prices overall
Open Interest	Net outstanding open contracts that have been purchased
	meaning only count 1 side
Ratio Spread	no of options sold > number purchased
Straddle	Any position that involves both puts and calls on the same side of the market, with same strike price
	Both options have the same underlying and same expiration date
Strangle	Any position that involves both puts and calls on the same side of the market, with Lower strike price
	Both options have the same underlying and same expiration date
Open interest	The number of open positions for a particular options series. High open interest means that there are many open positions on a particular option, but it is not necessarily a sign of bullishness or bearishness.
Volume	The number of contracts—both opening and closing transactions—traded over a certain period. A high daily volume means many investors opened or closed positions on a given day.
Liquidity	The more buyers and sellers in the market, the greater the liquidity for a particular options series. Higher liquidity may mean that there is a demand for a particular option, which might increase the premium if there are lots of buyers, or decrease the premium if there are lots of sellers.
Married Put	You simultaneously purchase shares of stock and a put on that stock

Credits: https://www.optionstrategist.com/products/category/free-analysis-tools

Free Online Courses (Other than Google) to Upgrade Yourself

As a continuation from my previous post on Free Google Courses Recommended, I have researched and tried out the free courses available online. I cannot stress on the importance of continuous self- development be it career related or not. Not only is it stimulating to your mind as you get exposed to unfamiliar things, you will be able to utilize some of the points read in your daily life. Besides, it never hurts to know more right! You can also use these pointers as a conversation starter. For example, I am currently going through the Digital Garage by Google which teaches you about marketing in the digital age. Even though this subject is totally different from what I am doing in my line of work, I still find it interesting because I can now better appreciate the elements behind selling a product or service and the promotion efforts behind it.


Note that this post is geared towards an individual who is keen in development in Analytics, Marketing and SEO, Finance and Programming Languages. Skills which are set to get a stronger foothold in years to come. This list is definitely not exhaustive as I only recommend those I have tried before.

6 Steps to a Trading Decision

1. State your Forecast

- important to be specific about price of stock and time frame
e.g. XXX stock will rise from $10 to $15 in 20 days. Today is 40 days to expiration.


2. Calculate the Implied Volatility

- volatility percentage in the option pricing formula
- Stock price
- Strike price
- Dividends
- Interest Rates
- Days to expiration
- Volatility


OIC Option Pricing Calculator

Trading Strategies

1. Stock- Oriented Strategy - Covered Straddle

- Normally price rise, sell shares to realise profit. Price drop, buy more shares.

- BUT Alternative to waiting for price rally/ dip --> can use COVERED STRADDLE
--> call + put with the same strike price and expiration date


LONG STRADDLE 

- Buy both call + put
- depending on the underlying stock's direction of movement, either the call will profit more than the put (vice versa)

Option Price Behaviour

1. Strike Price - if the stock price don't move beyond the strike price, then the option will expire worthless


2. Time to Expiration (time decay) - the longer the time, the higher the option price

- the most time decay happens as option is near expiry


3. Effect of Interest Rate on short- term options prices is small

rise in i/r --> rise in CALL, drop in PUT

"Best" Option Strategy for each Implied Volatility rank

Implied Volatility percentile	Strategy
Net Buyer
0 to 50	Debit Spread
	Calendar Spread
	Ratio Spread
	Diagonals
Net Seller
50 to 70	Credit Spread
	Iron Condor
	Broken wings butterfly
Net Seller
70 to 100	Straddle
	Strangle
	Wide iron butterfly
Place trades at ~ 45 days to expiration, sell at ~15 days to expiration
25 - 40 days - sell
< 45 days - buy

Credits: Option Alpha