Difference between Spot FX and Futures Options

Spot Fx vs Options

Difference between Equity Options and Currency Futures Options

Equity Options vs Fx options

Is it worth buying Fx future options?

Why buy Fx options

How beneficial is selling Fx future options?

Why Sell Fx Options

Why buy or sell the Deep In-the-money (DITM) options?

Why trade Deep-in-the Money Options?

How much minimum do I need to invest to trade options?

Do I need deep pockets?

What is Time Decay?

What is Options time decay?

What is Delta and Time Decay?

In the world of options trading, there are an important set of measurements known as options Greeks that consist primarily of delta, gamma, theta, vega, and rho.

Options Greeks are the fundamental components of an option’s price. Understanding the Greeks Is critical to take advantage of opportunities in the options market.

Delta = Degree of Price Changes

Delta represents price change that an option contract has in regards to a $1.00 movement in the underlying asset.

Simply put, delta is the amount of price sensitivity a particular option contract has.

If an option has a delta of 0.30 it should theoretically move $0.30 for every $1.00 movement in the underlying asset.

For call options, delta ranges from 0.00 to 1.00. And for put options, delta ranges from -1.00 to 0.00.

Deltas for at-the-money options, regardless of the amount of time until expiration, typically hover around 0.50 for calls and -0.50 for puts.

Another good way to think of delta is the probability that an option has of expiring in-the-money. For example, if a call option has a delta of 0.30, there is a 30% probability that the option will expire in-the-money, assuming there is volatility stays same.

Gamma = Rate of Change in Delta

Gamma represents the rate of change of an option’s delta.

In other words, gamma refers to how fast the price of an option can change.

For example, if a call option has a delta of 0.30, and the underlying increases by $1.00, the delta will no longer be 0.30. Let’s assume the delta is now 0.50.

The change in delta from 0.30 to 0.50 – 0.20 – that is gamma.

Options that are very close to expiration will always have a high gamma, because the final outcome of an option at expiration has only two outcomes: in-the-money or out-of-the-money.

When an option expires in the money, it always has a delta of 1.00 for calls or -1.00 for puts, because 1 option contract represents the value of a standard contract (in case of EurUsd pair it is US$125,000) and remember, a delta of 1.00 equates to the market (spot) price of the pair.

Options with a high gamma are considered risky, for both buying and selling, because the value of the option is expected to change very rapidly within a short period of time. High gamma options mean the option’s delta has changed very rapidly. Since delta is, in essence, the price sensitivity of an option, options with high gamma are subjected to huge and wild changes in price.

Theta = Time Component

Theta is the time component of an option contract that is based on a one-day decrease in value as the option nears expiration.

In other words, theta is the amount of money that an option is going to lose every day until expiration. It is important to note that theta is always a negative value and gradually increases every day. It hurts a buyer and helps a seller.

However, theta affects options differently. At-the-money options and out-of-the-money options will have greater theta values and lose more money than in-the-money options. This is because of the nature of options contracts. Theta is not as big of a pricing component for ITM options as it is for ATM and OTM options. ITM options are mostly comprised of intrinsic value, whereas OTM options have no intrinsic value and are comprised largely of theta.

OTM options always have a possibility of expiring ITM and therefore have intrinsic value. This possibility is mainly reflected with the value of time premium built into the contract.

The concept is simple: on a longer time-horizon, there is more time for the underlying currency pair to move up or down, so there is more of a possibility of OTM options expiring ITM and therefore having value at expiration.

As expiration nears and the time-horizon shrinks, this possibility dwindles for options that have yet to make it ITM.

Vega = Sensitivity to Volatility

Vega is a measure of an option’s price per 1% change in implied volatility of the underlying currency pair. Currencies are quite less volatile than the stocks, still Vega is a factor that can't be ignored.

In simpler terms, vega is the amount that an option will move based on changes in implied volatility (forecast of future volatility based on present sentiment) of the underlying currency pair.

Volatility is probably the most important component of an option’s price, so it is crucial for traders to be aware of vega. When implied volatility of the underlying currency increases, both puts and calls will typically increase in value as vega increases as well.

High levels of volatility move rapidly with large downward moves in prices, as fear and uncertainty tends to increase. Nevertheless, volatility increases don’t just make puts more expensive, they make calls richer as well. Subsequently, when volatility decreases, the prices of options decrease as well.

Rho = Sensitivity to Interest Rates

Rho is probably the least significant component of an option’s price in the short-term because of the present regime of lower interest rates. It represents the expected change in an option’s price for a 1% change in the benchmark US Treasury-bill interest rate. It was a significant factor when interest rates were high before the 2008 market crash.

Rho represents the change in an option’s price according to changes in interest rates.

Because interests rates, which are set by the Federal Reserve, don’t fluctuate that much on a short-term basis, rho is relatively unimportant for options expiring in the short-term.

It is important to note that call options always have positive rho, and put options always have negative rho. As such, when interest rates increase, calls tend to increase. And when interest rates decrease, calls tend to decrease.

Video explains Delta and other Greeks

How Well Do You Understand Options Pricing And Options Strategies?

To help you answer this question, I have prepared three statements. Make sure to read them and then consider to what extent you agree with them:

1. I know more than 8 different options strategies and their basic payoff behavior. (Agree/Disagree)
2. I know what the Greeks are and how to use all of them in my trading. (Agree/Disagree)
3. I completely understand the relationship between implied volatility, time and price of a wide variety of multi-leg options strategies. (Agree/Disagree)

If you fully agree with all of the just-mentioned statements, you clearly have a very good understanding of options pricing and options strategies.

The Best Non-Directional Options Strategy in the Markets

TOM GENTILE Email Tom@PowerProfTrades

October 15, 2015 23

Many of the trading strategies I have shown you have been Directional Trades. That means the option position requires the underlying stock or ETF to make a particular move in price – either up or down – for the trade to work.

And that’s exactly what makes directional trades so challenging – trying to predict which way a potential trade will go is difficult. You can plan your trades carefully, follow your rules to the letter, and still the markets can intervene, turning a perfectly good prediction about a stock’s direction into a losing trade.

What’s more, indecision about a stock’s direction – and whether you want to buy calls or puts – can delay your trade, causing you to miss out on your predicted move.

How would you like a strategy that allows you to place a trade that doesn’t CARE which way it moves, just so long as it moves?

That’s just what I’m going to show you today…

Profit No Matter Which Way a Stock Moves

Non-Directional Traders don’t need to worry about making predictions based on complex market data, pages and pages of stock charts, or anything else. Non-Directional Traders make trades to benefit no matter which direction a stock moves… so long as it moves.

How? You might think you need to take two separate trades, one a long call and the other a long put.

That’s almost correct…

The Straddle is a non-directional trading strategy that incorporates buying a call option and a put option on the same stock with the same strike and the same expiration.

A Straddle allows you to have a bearish and bullish play on a stock at the same time, with each acting as a hedge or insurance against the other.

So long as the underlying stock moves up or down in a big enough price move to cover the cost of the trade.

Just Move!

How do you counter or prevent getting into a trade where the stock doesn’t move? You want to take an option trade on a stock that has what’s called a catalyst for a move coming up in the near future.

A catalyst is a reason. There has to be a reason for traders to make a decision to either buy the stock or sell the stock and do so in a fashion that causes the price to move higher or lower.

What types of events or announcements can a stock make that causes a big move one way or the other?

• A pending FDA approval for a new drug
• The hiring or firing of their CEO
• An upcoming earnings report
• The launch of a new product

Now, I should point out that the cost of a Straddle is considerably more than a straight bearish or bullish options play – because instead of just buying one option, you are buying two. Since cost is risk, the straddle trade has an increased price risk over the directional option trade because of this.

But your odds of making money are greater.

Look at it this way…

The underlying stock can do one of three things: Move up, move down, or move sideways. So with a directional options trade, you have a 1 in 3 chance of the trade working in your favor.

But with a non-directional trade, you have a 2 in 3 chance of making money because you can profit if the stock moves up OR down.

Of course, if the stock stays stagnant, both Theta, (time value) and intrinsic value will come out of both options, and losses happen rather quickly.

Let me show you a quick example…

Example: AAPL

As an example, let’s take a look at Apple Inc. (NASDAQ:AAPL). We’re going to use the company’s next earnings, due on October 27, as our catalyst. And whether it is before market open or after market close, I want to be out of the Straddle by close of market October 26 (I’ll show you why in a moment).

My option analysis tools can tell me a great deal of information on about behavior of stocks before and after their earnings over the last four earnings reports.

AAPL has beaten the actual estimate eight out of the last eight earnings. See below:

My option analysis tools also tell me what AAPL has done by way of a percentage price move prior to the last four earnings. See below:

It shows an increase in price on four of the last four earnings. The percentage shown is for the four days prior to the earnings report (which is why we want to be out by October 26, before the earnings hit).

The next graphic will show you the price move percentage after the earnings announcement for those same four earnings reports. See below:

As you can see, the move in AAPL had a 50/50 split between positive and negative price moves. This graphic represents the move of the stock from before the earnings and the day of (if Before Market Open – BMO) or the day after (if After Market Close – AMC).

Even though AAPL has beat their earnings expectations eight out of the last eight times, you can see that didn’t always mean the stock was going to go higher the day following its earnings announcement. That could be for a variety of reasons – perhaps they beat earnings, but missed on revenues, or revised projections downward for the next quarter, or both.

The thing to know is that a positive beat doesn’t guarantee a positive post-earnings move… and that’s perfectly fine for the Non-Directional Trader – any move is a potentially profitable one.

The goal of this opportunity is to get a run up or down in the stock prior to the earnings and get out the day before. In other words, we’re playing the run up before earnings rather than the earnings themselves.

Now let’s look at the options chain:

The straddle is constructed with a call and a put with the same expiration and the same at-the-money strike price (it may end up that the strikes are slightly in or out of the money as it is rare the stock price is exactly the same as the strikes).

The current price on AAPL is roughly $112.29, so the closest strike is the $112 call and put.

Click to Enlarge

Here is where the cost of the straddle can be an issue – at $8.25 on a per-contract basis, the Straddle is significantly more expensive than just buying the call or the put. But just as with our “loophole trades,” even though you are buying both it is still considered a single transaction by your broker (which means you’re only charged a single commission).

Now, the challenge of this trade is that AAPL needs to make a move prior to expiration of $8.23 to break even. That may seem like a daunting challenge, but if you look at your charts on AAPL, you will see that 8.23+ point price moves have indeed happened, and have done so in a month’s time.

Now, this may not be a strategy where you are looking for a 100% return. You may have to settle for a 50% ROI. Set a profit target goal and also be willing to take what profit you can based on what your trade plan dictates.

Here’s your trading lesson summary:

The Straddle is a non-directional trading strategy that can profit no matter which way a stock moves… so long as it moves.

1. Find a stock with an upcoming catalyst – any reason for it to move up or down.
2. Buy an at-the-money call and an at-the-money put with the same strike price and expiration.
3. This strategy may limit your returns, and 100% isn’t always possible because of the low-risk nature of the trade. So be sure to set your profit targets and stick with th