It is welcome to the water and muck and make a program this will be week two Option Greeks.
My name is Terence.
So let's start off with DRC see options clearing coporation.
The upshot is clear incorporation is jointly owned by the exchanges that create options and issues all
listed options and controls and effects all exercises and assignments.
So sort of a flow where an option right there will write an option and the option contract will be passed
to the RCC and the RCC would then make a payment through the option right in on the other hand the option
buyer will receive a payment from the UCC by buying that option when the option is exercise.
So this will be the process of the RCC the option buyer sends an exercise note to the broker and the
broker.
True its administrative department sends a notice of exercise to the RCC uses you then deliver the Shasta
to a broker who puts the shares in the call of Khoda sense the exercise.
Note the Astor's broker's customer's account.
So UCSC would then select randomly a member from who was shot in the exercise call and assigns them
the exercise of the receiving exercise.
Notice the call right this broker delivers the chance to be OCZ and after sending the Shasta Yosi Siedah
calls right this Broga science exercise to one of its customers.
It is selected randomly or on a first in first out basis the assigned call write them must deliver the
shares or provide the shares already in his account.
Even if it was a covered call so performance raise the standardize options contrac help reduce performance
risk from other investors.
Now remember that USAC will guarantee every trait entering the market remains active
no or field types of settlements.
D Now physically separate options options contracts whereby we set them in requies the actual physical
delivery of the underlying security.
In other words you would be receiving a note like this.
So you'll be holding shaps of a particular stock.
The next type of set the mood will be cash.
Set them in cash.
Set the options or set the means done via the payment of cash at the time of exercise or expiration
only down when the delivery of the underlying securities inconvenient cross-city are simply not possible.
Note indexes like S&P 500 Nasdaq would be cash setted.
So let's take an example for Apple.
Assuming we own Apple at the strike price of hundred.
So in other words we bought a call option of Apple at a share price of hundred.
Now let's assume Apple closes at 115 so us the buy off option.
You will be able to exercise your option and receive 100 shares of Apple for $100.
In other words you have a profit of $15 because you own the call option of Apple.
Now with the same example let's say we're on the same call contract at hundred Schreck price.
Now let's assume Apple closes at ninety five and in this case the buyer of option will lose the entire
apple option.
Now if you are paying $1 for this call option you will be losing $100 because one option contract is
100 shaps Now now even if Apple closes at 80 75 70 pointed prices lower than hundred your losses will
be limited that the premium paid
mistake.
Another example the SBX SBX Let's assume we bought a call on SBX at the strike price of one hundred.
Now at the expiration let's assume SBX closes at one to five point nine five.
Now you as you know if the option you receive five hundred ninety five in profit but contrac
says the set of option you would pay a five hundred ninety five dollars back on track to the buyer of
the option.
So this would be the stock assignment process.
Read the option buyer would pay an option premium that is Cella.
Now in our last video we talk about the option buyer has the right but not the obligation to exercise
the option contract.
So in this case if Apple closes at 1 2 0 5 4 9 5 it will make sense for the option buyer to exercise
this option contract because this option contract will be in the money.
So when the option buy it closes the option.
Contrac asked GSB X closes at one to five point nine 5 that would result in a five hundred and ninety
five profit.
So what happens if I get assigned a stock not a worse option is to close the position.
If you do not intend to hold the stock the next option is to top up your column which is not recommended
because you know in other words if the position is going against you that might compound the losses
and of course the third option will be the deal with margin calls margin calls because from the Brocas
that top up the require merging the main been that position.
So this will be the components of call option the underlying security contract sizes expiration date
Shreck prices.
Same goes with a put option
example stock options would be options on Google.
G Tesla Exxon-Mobile go pro in other words.
We have thousands of companies to choose from and when we trade stock options the earnings trading of
water in these laughing stock options there are always new players to trade.
So in other words if theres a new stock listed on the stock market you can trade the stock using options.
And the drawback would be unsystematic race.
So you know for stocks several stocks might go bankrupt.
You know stocks like Lehman Brothers stocks are like.
And wrong.
Those are cases where companies go bust.
So you know you might have unsystematic race when it comes to trading just one stock and the second
drawback will be lack of liquidity.
Now the deep volume for stock options would definitely be lower than the volume for index options which
are explained later in this video.
And number two you will be fair trading opportunities for any trade stock options.
So index options will be options on indexes like the S&P 500 Rozell Nasdaq and given ditch the upside
for trading index options would be.
It is liquid.
So the volume will be huge and there are lots of buyers and sellers for index options and most of the
index options are cash separate.
Like I mentioned earlier in this video day and this a lot of hedging potential when it comes to trading
indexes options.
So let's assume if you hold a basket of stocks and you like to hitch the downside risks of your basket
of stocks.
So you could possibly be buying put index options.
So just in case if the stock market drops you know your options will be giving you some profits covering
the downside risk.
If the market tanks now four index options for SBX will have a larger contract sizes so it might not
be suitable for most of the small account holders but we have indexes like Espey which is a mini S&P
500 Contrack and 4 indexes you tend to see lower Ivy rang or implied volatility which are explained
in the next few videos that the drawback will be no ending's trades available because four index options
do have a basket of stocks so this probably hundreds of stocks listed you don't own one index like the
Rozell or S&P 500
not that type of options are the ETF options.
So ETF options are the options like IWM which is the ETF covering the Rozell which is the ETF mirroring
the Russell 2000 XLE which is the energy ETF exile f financial ETF or an X. OK.
The technological sector ETF.
So for ETF options you have less calories compared to a single stock and most of the options are liquid
with deep markets.
So you have a lot of options when it comes to options because you could be selecting different industries.
So examples like XLE exile laugh the first drawback will be you have double triple inverse choices and
the next drawback will be too many Inupiaq options.
So some of the half might be illiquid and be pressings arccos often for options.
Now let's move on to beat out which is one of the option Greeks snubby beat is a mash up of stocks of
volatility in relation to the market.
If the if the market rises by 5 percent the stock will rise by a certain percentage.
Sabita is the market rates.
Let's assume the beat of one boy no.
And this shows that the stock is as volatile as the market and will be more or less time before the
market higher or lower.
Now we could also bet I'll read our portfolio.
Let's assume I have five to 10 stocks on writing a song become and I like to bet against the S&P 500.
So you could be using the bit of weight to Buffalo which is over here.
The beat out we are gains the S&P 500
so by Bayt awaiting the stocks that you own.
Yes and to the S&P 500 it will give you the Delta which is the next option group.
I'm going to be talking about
now the two options component extrinsic value and intrinsic value.
Let's assume that the price of this option is 130.
So.
So that 30 cents will be the extrinsic value which is the prime value of the auction.
And this is decay from 45 days study a solid rate 30 days 30 days in and then 0 day which is the expiration.
So you can see the assertion of the time decay and time decay would be good.
And on yachting on some platform you would be able to populate Teater for your flu by clicking this
gibbeted customize columns.
Just double click on TTR right.
So this is just the right side click click OK and they go.
So that means that for trade like Home Depot desisting tree that I have it has seventeen point eighty
means that I have a possibility for this trade.
So every day I'm receiving seventeen point eight seventeen dollars and 80 cents on this on the street.
And this will work in my favor if an option is having a neck the door.
That means that I'm it means that my option is decaying.
Every single day and I'm paying a certain amount depending on the value state that here.
So for Home Depot every day I'm getting seventeen point eighty and that is the time decay or the extrinsic
value and this sort of rate to zero which is the expiration so let's go back to same example for Hitch
the Home Depot.
Let's see how the time decay work in our favor.
So we have three days left for Home Depot.
OK.
And the maximum profit is a thousand sixty.
So as the expression closes soon you can see the time decay worked in my favor as the purple line melts
in the blue line.
So that is how the time became what in your favor.
And as you can see if on the February the 3rd as long as Home Depot is around this area I should see
a maximum profit.
OK.
And you know even if Home Depot stays at the 1 7 level
you should be seeing an increase in profits.
So Fabray to first of the IT 5 1 Fabry to second would be been nine hundred Fabry that will be 971 and
that is how the time decay will work in your favor.
If you are selling a credit spread.
So for credits Retz because this is a positive thing to our position you'll be benefiting from the melt
off of the time decay our time value and our key.
So that is why I love to establish vertical spreads and the time decay will be on our side and we'll
be benefiting on the time B.K. every single day.
It's about two weeks ago so we collected some decent profits second see everyday you know this adds
into the PNL open.
Right.
So where we make sense and
this give you an example of the difference between buying a call and writing a call up another term
for writing a call is selling a car.
OK.
So buying a car means that we are out right buy a call option and you have a bullish outlook and the
risk is limited that a premium paid Okay.
And of course your next report will be limited.
Now I must warn you that if you're buying a call option you have to make sure that the implied volatility
is low because you do not want to pay for expensive options.
Right.
And with that we will be guiding you on how to install the ivy script.
OK.
So what is implied volatility.
Right.
So I'm going to just guide you step by step on how to install the implied volatility.
So when you click on the button below.
This will be the folder that you have access to.
Right.
Just launched GAVI screen documents you can open this way Microsoft Word.
Right.
With all of those screen.
Go back to letting us in platform click on charts.
Click on added studies right.
Go back to that document.
Copy this whole section
new right so I can just remove this and paste from the Word document.
All right click OK and then click OK.
But to see the screen.
Right.
So there you have it.
The implied volatility is screwy.
OK.
Now the implied volatility ranges from 0 percent to 100 percent.
So in this case why some five hundred fourteen percent is considered low.
It means that the options are cheap.
OK.
So back to the back to the notes buying a call and writing a call.
OK.
So when the implied volatility is at 14 percent OK it makes much more sense to just buy an option instead
of setting an option because the option the implied volatility is low and options are cheap.
OK.
So let's run the simulation to get the same curve in the nose that we have.
So for us of the 500 Let's assume for a bullish outlook on the S&P 500 and we expect the underlying
to rise within say the next one or two weeks or so.
Break on and the lice at simulate that trait
right so let's assume we espec the S&P 500 in the next 15 days to rights.
So and the lies by trait single because single take option.
Right.
So they aphid declare OK the risk profile for this for buying a call.
All right.
So let's check how much we're paying in premiums.
Let's assume it's
one law on the S&P 500
so we're spending a thousand one hundred and seventy the Buy a call option on the S&P 500.
OK.
Now let's see if the underlying facts and B rises due to tree one aide in the next few weeks.
I'd like to know what is the profit.
OK so if the other leg rises to true 1:08 as you can see on the risk profile curve the profit is around
two thousand three hundred sixty four.
Okay.
And with the notes the reason why this is unlimited Max rebought is you know as SMB rises high you can
see the profit saturating accordingly.
Okay.
So remember that the cost of buying one call option on the S&P 500 is a thousand one hundred and eighty
and you have an unlimited upside potential for the S&P 500.
OK.
Now on the other hand let's assume we buy a put option on the S&P 500.
OK.
If we buy a put option we are expecting that the S&P 500 will drop OK in the next let's assume two weeks
from now.
OK.
So you'll be spending in this case 2380 the buy a put option on the S&P 500.
Now if the S&P 500 drops to say 32 65 your profit is around six hundred and forty five.
And this set of rate as we go.
OK.
As the S&P drops even further.
Right.
So that's you use the same example for writing a call or selling call.
Right.
Same stap S&P 500.
OK.
So we're going to be analyzing a sell trade or case.
Now we are selling one call option contrac
on the S&P 500 expiring on February the 15th.
So let's jack What is the premium will be receiving.
OK.
If we were to sell a call option on the S&P 500 a recessive Rasoul best selling call option at a Schreck
price of 20 to 85 Okay.
So as the SNP 500 drops to anywhere below 22 85 in ex-Vice Anyway below 32 85 your max profit is capped
at a thousand dollars and 70 or K as the S&P rises.
If the option by exercises this call option you'll be in a loss.
Okay so as you can see the risk is unlimited.
If you're selling a call option.
OK.
Same goes with put option so far put option near expecting the S&P 500 to rise higher.
Okay.
So as the S&P rises higher and closer us anywhere above of 22 85 at expiration you'll max profit will
be two thousand two hundred and seventy.
OK.
Now if the S&P 500 drops to say through to 7 B-tree 69 64 right.
Be lossa salary.
You know as the S&P drops further.
So in this case you will be losing a limited amount of money if the S&P drops.
OK.
So that is an example of buying a call and selling a call saying goes or buying a boat or selling a
book or you have to do is change the contract and the risk profile and this or show you a different
curve
so buying a call Schreck Bryce can be select that you can choose any Shreck price for any option contracts.
So right away he can choose any check prices.
And to adjust accordingly based on the most current data.
Now if long put you are expecting the price to drop and let's say if we long put a strict price a
right so instead of setting a call we are selling.
We are buying a put right at 85 our max loss which is the price that we pay for this put option will
be 2000 and 400.
Now as the S&P drops through the price of two 2:59 the profit is at about
do 2:59 the profits at about thousand dollars as a B drops but you could see a rise in the profit.
OK.
And as you can see the profit is unlimited.
OK yes and SMB drops
option breaks.
So spring breaks come from the pricing model.
Usually the Drexel's model which that gives us the implied volatility and quantify this factors so Delta
is the options sensitivity to changes in the underlying stock price.
Let's assume we use Microsoft Weafer stock price at March 55 call Teressa out of 0.4.
If Microsoft goes up by $1 the option should increase by 40 cents
noted are the options.
Sensitivity to time it is a direct measurement of time became.
So in other words the example I gave you earlier it will show you how much you be in or pay.
All right.
If you are a buyer of option you'll be paying in time decay if you set of option you'll be receiving
having a positive feedback on your portfolio.
Right.
And Gamma Gamma is the options sensitivity.
The Delta changes in price of the underlying asset meshes.
The change of Delta for one dollar change in the underlying.
In other words the rate of change of options price and roll will be the sensitivity to changes in interest
rates and increase in interest rates decreases in option value because it costs more to pay the position.
Contract multiplier.
Now most of the contracts that you see on TV are seen as standardize.
So if standardize option contracts it has to fall in uniformity contracted sizes.
Check prices expiration dates holistic Appert as an example.
Apple has an option of both stock.
So they really have a consistent size stake Nov. 1 5 expiring date do they use nesika to see the price
of this option is six dollars and seventy five cents.
So for one option Contrack.
So one option contract is equivalent to 100 shares.
In other words six dollars and seventy five cents you need six hundred and seventy five to acquire one
option contract of Apple.
All right so this is before we do the install your cost might be scrape and also and of course to differentiate
between buying a call selling or call buying a put and setting a put by running the risk profile to
on your team or see again if you have any questions you can always drop me an email.
Terence electret dot com if you have any problems installing your creep you can also drop me an email
and I'll be more than happy to assist.
So I hope you enjoy this online video lesson.
An actual next video lesson.