"The Option Traders Hedge Fund" notes

Question 1

Option time premium decays exponentially across all strikes in the final 30 days of an options life. T or F?

Answer 1

False: As price moves further away from ATM, options decay much more linearly

Question 2

Vega is the same as IV. T or F?

Answer 2

False: IV is implied volatility; Vega is the amount of money per underlying share that the option’s value will gain or lose as volatility rises or falls by 1%

Question 3

Abnormally steep shew can indicate either…

Answer 3

rising volatility or falling volatility, be cautious

Question 4

for a successful condor trade, volatility need to be….

Answer 4

stable or declining

Question 5

Front month or back month options are more sensitive to IV changes?

Answer 5

Front month are more sensitive to IV Changes;

Question 6

3 rules to avoid catastrophic loss (from: “The Option Traders Hedge Fund”)

Answer 6

1. never short options worth .10 or less
2. if you are short an option worth less that .10, buy to close
3. be long “units” with selling premium strategies

Question 7

Cone of feasibility

Answer 7

As an option moves from being logically in-the-money to an option that cannot end up in-the-money, this is when options give up the bulk of their value.

Question 8

Greatest danger to a condor

Answer 8

is a move in volatility from low to high during the trade

Question 9

recommended expense of insurance on an iron condor…

Answer 9

not more than 10% of credit received

Question 10

unit/OTM puts insurance is most effective and most necessary when…

Answer 10

Volatility is in the 50% of its historical range;

Question 11

edge in a trade means..

Answer 11

profit quickly means there was edge in the trade and edge should always be captured in a timely manner, get out early and re-evaluate