Options Trading

Question 1

Delta

Answer 1

Represents the sensitivity of an option´s price to changes in the value of the underlying security.

How much an option will move given a $1 move in price.

Question 2

Gamma

Answer 2

Represents the rate of change of Delta relative to the change of the price of the underlying security (for every $1).

Maximum ATM

Question 3

Theta

Answer 3

Represents the rate of time decay of an option.

The value an option loses every day due to time decay.

Question 4

Vega

Answer 4

Represents an option´s sensitivity to (implied) volatility.

How much option price will move from a 1% change in IV.

IV goes up by 1% then Vega goes up by Vega value.

Vega can be any number.

Question 5

Rho

Answer 5

Represents how sensitive the price of an option is relative to interest rates.

Question 6

Black Scholes Formula

Answer 6

The formula the Greeks are derived from.

Question 7

Four main factors that affect the option price

Answer 7

1. Current price of asset
2. Strike price of option
3. Volatility of asset
4. Expiration time

Question 8

Two minor factors that affect the option price

Answer 8

Risk free interest rates

Dividends

Question 9

Option price

Answer 9

Time till expiration + volatility + intrinsic value

Question 10

Intrinsic Value

Answer 10

Distance between the strike price and the share price (if the contract is currently in the money)

Question 11

Delta value

Answer 11

0. 00 to 1.00 for calls
1. 00 to -1.00 for puts

ATM = 0.5
ITM = 0.5 to 1
OTM = 0 to 0.5

Question 12

Extrinsic Value

Answer 12

Time Value and Implied Volatility

Question 13

Premium

Answer 13

Intrinsic value and Extrinsic value

Question 14

Implied Volatility

Answer 14

How easily does the stock jump around.