Options

Understanding Option Greeks and Dividends: Delta

One of the biggest mistakes new options traders make is buying a call option in order to try and pick a winner. After all, buying calls maps to the pattern you’re used to following as an equity trader: buy low, sell high, in that order. Options are trickier. Sometimes the underlying stock moves in the […]

Options

Understanding Option Greeks and Dividends: Gamma

Keep in mind that delta is dynamic: it changes not only as the underlying stock moves, but as expiration approaches. Gamma is the Greek that determines the amount of that movement. Gamma is the amount a theoretical option’s delta will change for a corresponding one-unit (point) change in the price of the underlying security. In […]

Options

Understanding Option Greeks and Dividends: Rho

Rho is the amount a theoretical option's price will change for a corresponding one-unit (percentage-point) change in the interest rate used to price the option contract. Typically the interest rate used here would be the risk-free rate of return. The rate associated with investing in Treasuries is traditionally defined by market experts as virtually risk-free. […]

Options

Understanding Option Greeks and Dividends: Theta

Theta refers to time decay and is the amount a theoretical option’s price will change for a corresponding one-unit (day) change in the number of days to expiration of the option contract. Each moment that passes melts away some of the option’s value. Not only does the premium melt away, but it does so at […]

Options

Understanding Option Greeks and Dividends: Vega

Vega is one of the most important Greeks, but it often doesn’t get the respect it deserves. Vega is the amount a theoretical option’s price will change for a corresponding one-unit (percentage-point) change in the implied volatility of the option contract. Simply stated, Vega is the Greek that follows implied volatility (IV) swings. Don’t forget […]

Options

Options Trading Mistake #10: Legging into spread trades

Most beginning options traders try to leg into a spread by buying the option first and selling the second option at a later date. They're trying to lower the cost by a few pennies and it simply isn't worth the risk. Don't leg in if you want to trade a spread. For example, you might […]

Options

Options Trading Mistake #3: Not having a definite exit plan prior to expiration

You've heard it a million times before. In trading options, just like stocks, it's critical to control your emotions. This doesn't mean swallowing your every fear in a super-human way. It's much simpler than that: have a plan to work, and work your plan. Planning your exit isn't just about minimizing loss on the downside. […]

Options

Tips for Writing Successful Covered Calls (Part 2)

What is assignment? If you sell a covered call, you're accepting an obligation in exchange for the option premium you collect. Your underlying shares of stock might be “called” away from you if the option buyer chooses to exercise. We say “might” here because it's not guaranteed that you'll be asked to honor this obligation. […]

Options

Options Trading Mistake #4: Making up for past losses with risky “Doubling up”

I've heard many option traders say they would never do something: _never buy really out-of-the-money options, _never sell in-the-money options. These absolutes seem silly — until you find yourself in a trade that's moved against you. All seasoned options traders have been there. Facing this scenario, you're often tempted to break all kinds of personal […]

Options

Tips for Writing Successful Covered Calls (Part 3)

Tip 2: Don't panic if you're assigned. If you're called upon to deliver stock, it can come as a surprise. Some covered call writers worry about losing a long-held stock position this way. But you have more choices in this situation than you may realize. Let's say you've bought 100 shares of XYZ per year […]