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Stocks and Options > Options Trading > Flashcards

Options Trading Flashcards

1
Q

Concept of Implied Volatility

A

What Marketplace is implying the volatility of the stock will be in the future in respect to price changes in an option

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2
Q

How can Implied Volatility estimate potential range of movement on a stock

A
  • Expressed as percentage of the stock
  • Indicating one standard deviation move for T = 1
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3
Q

stock XYZ is trading at $50, and the implied volatility of an option contract is 20%. -> implies that

A
  • consensus in the marketplace that a one standard deviation move over the next 12 months will be plus or minus:

($50 x 0.20) = $10

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4
Q

Percentage of one standard deviation on normal distribution

A

68%

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5
Q

Percentage of two standard deviation on normal distribution

A

95%

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6
Q

Percentage of three standard deviation on normal distribution

A

99%

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7
Q

How much percentage of the time will stock be above $60 and how much percentage of the time still stock be below $40

A

16% of the time above $60

16% of the time below $40

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8
Q

Implied volatility can help you gauge

A

the probability that a stock will wind up at any given price at the end of a 12-month period

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9
Q

Calculation for one standard deviation move over the life of an option

A
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10
Q

Delta

A

change in option price per $1 change in stock price

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11
Q

In respect to Delta: in-the-money options will move more than

A

out-of-the-money options

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12
Q

In respect to Delta: short-term options will react more than

A

longer-term options to the same price change in the stock

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13
Q

Delta probability concept

A

as the probability an option will finish in-the-money

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14
Q

Gamma

A

change in delta in respect to ever $1 change in underlying asset

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15
Q

Options with the highest gamma are

A

the most responsive to changes in the price of the underlying stock

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16
Q

Put Credit Spread set up

A

Known as: Bull Put Spread

Short 1 OTM Put

Long 1 OTM Put lower K

result: net credit

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17
Q

Put Credit Spread Volatility Impact

A

Enter trade when IV Rank is above 50

Falling IV will help position

Rising IV will hurt position

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18
Q

Put Credit Spread Time Decay

A

Theta works positively for the position

Expect all or part of the trade to expire worthless

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19
Q

Short Naked Put set up

A

Short 1 OTM Put below market

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20
Q

Short Naked Put Volatility Impact

A

Enter trade when IV Rank is above 50

Falling IV will help position

Rising IV will hurt position

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21
Q

Short Naked Put Time Decay

A

Theta works positively for the position.

Expect all or part of the trade to expire worthless at expiration

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22
Q

Put Broken Wing Butterfly set up

A

Long 1 ITM Put

Short 2 OTM Puts near ATM

Skip Strike

Long 1 OTM Put

Result: Net Credit

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23
Q

Put Broken Wing Butterfly Volatility Impact

A

Enter trade when IV Rank is above 50

Falling IV will help position

Rising IV will hurt position

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24
Q

Put Broken Wing Butterfly Time Decay

A

Theta works postively for this position.

Expect all or part of the trade to expire worthless at expiration

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25
Q

Custom Naked Put set up

A

Short 1 OTM Put

Short 1 OTM Call

Long 1 OTM Call higher K

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26
Q

Custom Naked Put Volatility Impact

A

Enter trade when IV Rank is above 50

Falling IV will help position

Rising IV will hurt position

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27
Q

Custom Naked Put Time Decay

A

Theta works positively for this position.

Expect all or part of the trade to expire worthless at expiration

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28
Q

Call Debit Spread set up

A

Long 1 ITM Call

Short 1 OTM Call at higher K

Result: Net Debit

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29
Q

Call Debit Spread Volatility Impact

A

Enter trade when IV Rank is below 50

Falling IV will hurt position

Rising IV will help position

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30
Q

Call Debit Spread Time Decay

A

Theta works negatively against position

If strategy not ITM at expiration then it expires worthless

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31
Q

Call Calendar Spread set up

A

Short 1 OTM Call in the Front Month

Long 1 OTM Call in the Back Month w/ same K

Result: Net Debit

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32
Q

Call Calendar Spread Volatility Impact

A

Enter trade if IV Rank below 50

Falling IV hurt position

Rising IV will help position

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33
Q

Call Calendar Spread Time Decay

A

Theta works positively with position as long as the stock remains range bound which maxes the monthly contract skew

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34
Q

Call (Ratio) Backspread set up

A

Short 1 ATM Call

Long 2 OTM Calls higher K

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35
Q

Call (Ratio) Backspread Volatility Impact

A

Trade when Rank IV below 50

Falling IV will hurt position

Rising IV will help position

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36
Q

Call (Ratio) Backspread Time Decay

A

Theta works negatively

If not ITM at expiration then expires worthless

37
Q

Put Diagonal Spread set up

A

Short 1 OTM Put in the Front Month

Long 1 OTM Put in the Back Month at lower K

Result: Net Debit

38
Q

Put Diagonal Spread Volatility Impact

A

Trade when Rank IV below 50

Falling IV will hurt position

Rising IV will help position

39
Q

Put Diagonal Spread Time Decay

A

Theta works positively with position as long as stock reamins range bound which maxes the monthly contract skew

40
Q

Short Straddle set up

A

Short 1 ATM Put

Short 1 ATM Call same K

Result: Net Credit

41
Q

Short Straddle Volatility Impact

A

Rank IV above 50

Falling IV will help position

Rising IV will hurt position

42
Q

Short Straddle Time Decay

A

Theta works positively for the position

Expect all or part of the trade to expire worthless at expiration

43
Q

Short Strangle set up

A

Short 1 OTM Put

Short 1 OTM Call higher K

Result: Net Credit

44
Q

Short Strangle Volatility Impact

A

IV Rank above 50

Falling IV will help position

Rising IV will hurt position

45
Q

Short Strangle Time Decay

A

Theta works positively

Expect all or part of the trade to expire worthless at expiration

46
Q

Short Iron Condor set up

A

Short 1 OTM Put

Long 1 OTM Put lower K

Short 1 OTM Call

Long 1 OTM Call higher K

47
Q

Short Iron Condor Volatility Impact

A

IV Rank above 50

Falling IV will help position

Rising IV will hurt position

48
Q

Short Iron Condor Time Decay

A

Theta works positively

expect all or part of the trade to expire worthless at expiration

49
Q

Short Iron Butterfly set up

A

Short 1 ATM Put

Long 1 OTM Put at Lower Strike

Short 1 ATM Call

Long 1 OTM Call Higher Strike

Result: Net Credit

50
Q

Short Iron Butterfly Volatility Impact

A

IV Rank above 50

Falling IV will help position

Rising IV will hurt position

51
Q

Short Iron Butterfly Time Decay

A

Theta is positive

Expect all or part of the trade to expire worthless at expiration

52
Q

IV Rank below 50 and Neutral on the underlying direction of the stock

A

Do not make any trades

53
Q

Call Credit Spread set up

A

Short 1 OTM Call

Long 1 OTM Call at Higher K

Result: Net overall credit

54
Q

Call Credit Spread Volatility Impact

A

IV rank above 50

Falling IV will help position

Rising IV will hurt position

55
Q

Call Credit Spread Time Decay

A

Theta positive

Expect all or part of the trade to expire worthless at expiration

56
Q

Short Naked Call set up

A

Short 1 OTM Call above market

57
Q

Short Naked Call Volatility Impact

A

IV Rank above 50

Falling IV will help position

Rising IV will hurt position

58
Q

Short Naked Call Time Decay

A

Theta is positive

Falling IV will help position

Rising IV will hurt position

59
Q

Call Broken Wing Butterfly set up

A

Long 1 ITM Call

Short 2 OTM Calls near ATM

Skip Strike

Long 1 OTM Call

Result: Net Credit

60
Q

Call Broken Wing Butterfly Volatility Impact

A

IV Rank above 50

Falling IV will help position

Rising IV will hurt position

61
Q

Call Broken Wing Butterfly Time Decay

A

Theta positive

Expect all or part of the trade to expire worthless at expiration

62
Q

Custom Naked Call set up

A

Short 1 OTM Call

Short 1 OTM Put

Long 1 OTM Put Lower K

63
Q

Custom Naked Call Volatility Impact

A

IV Rank is above 50

Falling IV will help position

Rising IV will hurt position

64
Q

Custom Naked Call Time Decay

A

Theta works positively

Expect all or part of the trade to expire worthless at expiration

65
Q

Put Debit Spread set up

A

Long 1 ITM Put

Short 1 OTM Put at lower K

Result: Net Debit

66
Q

Put Debit Spread Volatility Impact

A

IV Rank below 50

Falling IV will hurt this position

Rising IV will help this position

67
Q

Put Debit Spread Time Decay

A

Theta works negatively

If strategy is not ITM at expiration then it expires worthless

68
Q

Put Calendar Spread set up

A

Short 1 OTM put in the Front Month

Long 1 OTM Put in the Back Month at same K

Result: Net Debit

69
Q

Put Calendar Spread Volatility Impact

A

IV Rank is below 50

Falling IV will hurt position

Rising IV will help position

70
Q

Put Calendar Spread Time Decay

A

Theta works positively as long as the stock remains range bound which maxes the monthly contract skew

71
Q

Put (Ratio) Backspread set up

A

Short 1 ATM Put

Long 2 OTM Put at lower K

Result: Net Debit

72
Q

Put (Ratio) Backspread Volatility Impact

A

IV Rank is below 50

Falling IV will hurt position

Rising IV will help position

73
Q

Put (Ratio) Backspread Time Decay

A

Theta works negatively

If strategy is not ITM at expiration it expires worthless

74
Q

Call Diagonal Spread set up

A

Short 1 OTM Call in the Front Month

Long 1 OTM Call in the Back Month at higher K

Result: Net Debit

75
Q

Call Diagonal Spread Volatililty Impact

A

IV Rank below 50

Falling IV will hurt position

Rising IV will help position

76
Q

Call Diagonal Spread Time Decay

A

Theta works positively as long as the stock remains range bound which maxes monthly contract skew

77
Q

Option Pricing 2 components

A

Intrinsic Value and Extrinsic Value (Time Value)

78
Q

What are the components of Intrinsic Value

A

Spot Price and Strike Price

79
Q

What are the components of Extrinsic Value (Time Value)

A

Time to Maturity

Volatility

Rate of Interest

80
Q

Bullish Strategies:

A

Put Credit Spread

Call Debit Spread

Call Calendar Spread

Put Broken Wing Butterfly

Put Diagonal Spread

Custom Put Spread

Call (Ratio) Spread

Short Single Naked Put

81
Q

Neutral Stratergies

A

Balanced Iron Condor

Short Strangle

Short Straddle

Skewed Iron Condor

Iron Butterfly

82
Q

Bearish Stratergies

A

Call Credit Spread

Put Debit Spread

Call Broken Wing Butterfly

Call Diagonal Spread

Custom Naked Call Spread

Put (Ratio) Backspread

Short Single Naked Call

83
Q

ITM PUT

A

When K > S

= max{0, K-S}

84
Q

OTM PUT

A

When K < S

= max{0, K-S}

85
Q

ITM CALL

A

When K < S

= max{0, S-K}

86
Q

OTM CALL

A

When K > S

= max{0, S-K}

87
Q

Theta:

90-day options vs 30-day options

A

90-day options will loose less value per day than 30-day options with same K

88
Q

IV:

90-day options vs 30-day options

A

90-day options react MORE to changes in implied volatility than 30-day options with same K

Stocks and Options (1 decks)

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