Options

Long Guts - Overview

The long guts option strategy is a volatility trade that is created when the trader believes that there will be a sharp move up, or down in the underlying.  This options strategy involves buying an equal amount of ITM calls and puts, which have the same expiration date.  This strategy is a limited risk, unlimited return, direction neutral strategy requiring a net debit to initiate the position.  The long guts is very similar to the straddle

What is a Call Ratio Backspread?

A call ratio backspread is a good strategy if you have a strong conviction that the security you are buying options on will have a strong upside move.  Basically, the call ratio backspread is inverse to the call ratio spread in that you are shorting ITM call/s and buying OTM calls.  This options strategy calls for a greater number of OTM calls than ITM calls, all of the same expiration month and underlying security.  This strategy is a low risk, unlimited reward strategy that has the expectation of str

What is a Call Ratio spread?

A Call Ratio Spread is an options strategy for traders who believe that the stock go sideways to down until expiration of the option.  The strategy consists of buying 1 in the money call and selling 2 out of the money calls on the same underlying security and expiration date.  The only thing that will be different is the strike price of the options.  Additionally, the ratio of options we suggested above is only for example purposes; it could be 2 Long / 3 Short or any ratio that the investor chooses.  The objective is to put the trade on as a credit transaction. 

What is a Credit Default Swap (CDS)?

A credit default swap (CDS) is a credit derivative product which allows the holder of a fixed income security to transfer the credit risk portion associated of that security on to a counterparty for a fee.  A credit default swap is basically an insurance premium that a security holder pays to guarantee themselves against negative credit events such as bankrupcy or credit rating downgrades. The party buying insurance is known as the buyer, the party providing the insurance is the seller, and the security that is being insured in the transaction is known as the reference entity. 

In the case of a default or other negative credit event, the seller will either assume the reference entity and pay the buyer par value or pay the buyer the spread between the par value and the recovery amount, which is nothing more than the current cash value of the bond.

What is Implied Volatility?

The term implied volatility refers to an expectation of volatility in the underlying asset from the present till the options expiration, using current options pricing data as a basis.  The real benefit of implied volatility is in the fact that it allows us to estimate the size of a move, up or down.  The higher the number, the greater the expectation of volatility and price movement in the underlying. 

As you can see, the greater the volatility that is presented by an asset, the more expensive an option becomes due to the fact that it has a greater chance of achieving its target.  There is also a tendency for implied volatility to increase when the market is bearish and decrease when it is bullish.  This occurs due to the fact that the public associates higher levels of risk in a downtrending market versus an uptrending one.

Definition of Underlying Security

The underlying security, or underlier, is a specific security, commodity, or other financial instrument that is represented by an options or derivative contract. The owner of the derivative has the right to buy or sell the underlying security at a predetermined strike price before options expiration.

Index options, index futures contracts, and even exchanged traded funds (ETFs) are exempt from this definition since the underlying security cannot be delivered; therefore, they are automatically settled in cash at expiration.

The price of the underlying is the most significant factor in determining the price of an option contract.

See You At the Top,
mysmp.com

What is Intrinsic Value?

Intrinsic value is the portion of the option premium that is in the money.

What are LEAPS?

A long term equity anticipation security, aka. LEAPS, is a fancy term for a long dated option with expiration of at least 9 months in the future.  LEAPS are currently offered on about 450 equities (including equity indexes such as the Dow Jones - DJX and the S&P500 - SPY) and can be traded with calls and puts just as normal equity options. 

How to Use LEAPS?

What is a Strike Price?

The strike price of an option is simply a contractual price per share at which an option holder can exercise their right to buy or sell the underlying security that the option contract is based upon.  For this reason, strike price is also referred to as the "exercise price" of an option.  At options expiration, the holder of a call option that is in the money will by the underlying security at the strike price of the options contract.  Conversely, the purchaser of a put option will have the right to force the seller of the put to purchase the stock at the strike price.