Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Options > "The Volitility Edge in Options Trading" Jeff Augen > Flashcards

"The Volitility Edge in Options Trading" Jeff Augen Flashcards

1
Q

Date that Options began trading on the CBOE

A

April 1973

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

European style options can be exercised when?

A

only at the time of their expiration

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Anerican-style options can be exercised when?

A

anytime during their life

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

early exercise of ITM options does not happen, why?

A

because it involves discarding the remaining time premium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

The random-walk hypothesis asserts that…

A

asserts that the evolution of market prices cannot be predicted

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

The random-walk hypothesis is antagonistic to what school of thought…

A

technical analysis, chart patterns with predictive power

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

EMH

A

Efficient market hypothesis: predicts that market inefficiencies due to chart patterns do not exist.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

EMH’s 3 basic forms of efficiency

A

Weak Form; Semi Strong; Strong form

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Weak-form efficiency implies

A

that technical analysis cannot consistently produce positive returns; but recognizes the possibility of producing some return based on fundamental analysis of business performance and economic climate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Semi Strong efficiency implies that…

A

fundamental analysis is insufficient to yield positive returns. It assumes that share prices adjust to publicly available information almost instantaneously, making it impossible to place profitable trades using the new information.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Strong-form efficiency implies that…

A

share prices alone reflect all available information at any given moment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

strong-form efficiency implies that an individual cannot outperform the market. T or F?

A

F: individual traders can outperform or under perform the market as long as the entire group’s performance remains normally distributed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

can strong form efficiency exist where insider trading is illegal?

A

No, because all information must be priced into the market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

normally distributed 1, 2, and 3 SD percentages

A

1: 68.2%; 2: 95.4%; 3: 99.8%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

OTM options are nearly never exercised early because

A

it would mean buying or selling a stock at a loss immediately

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Implied Volatility (IV) is found by

A

solving for the Volitility variable using the pricing model and using the option’s current price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Historical Volatility (HV) is found by

A

through observed volatility of the price movement of the underlying

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

dividends normally have what affect on what options

A

dividends normally act to reduce call prices

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Put-Call Parity: C =

A

P + S = C

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Put-Call Parity: P =

A

C - S = P

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Put-Call parity: S =

A

C - P = S

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Define Delta

A

The value effect of a $1 increase in the underlying: Delta

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Define Gamma

A

The delta’s rate of change: Gamma

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Define Vega

A

The effect of a 1% increase in volatility

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Define Theta

A

The rate of time decay (usually expressed in dollars/day)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Define Rho

A

The effect of a 1% increase in the interest rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

The price difference between two calls or puts with same month and adjacent strike is what greek

A

Delta is the difference between two puts or calls with same month and adjacent strikes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

The price difference between two calls or puts with same month and adjacent strike is what greek

A

Delta is the difference between two puts or calls with same month and adjacent strikes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

is a position with positive delta bullish or bearish position?

A

bullish

28
Q

Is Delta affected by time?

A

Yes, the Delta of OTM options move closer to 0, and ITM options move closer to 1 as expiration approaches

29
Q

short calls and short puts always have ___________ gamma

A

negative gamma

30
Q

long calls and longs puts always have _________ gamma

A

positive gamma

31
Q

is a position with negative delta bullish or bearish position?

A

bearish

32
Q

long or short the underlying has _________ gamma

A

zero gamma, long underlying always has a delta of +1 and short underlying always has a delta of -1

33
Q

Negative gamma has what affect on delta

A

negative gamma will adversely affect the delta in the direction that benefits the trade as the trade continues to move in that direction; Negative Gamma = bad hedge for the position

34
Q

positive gamma has what affect on delta

A

positive gamma will enhance/grow the delta in the direction that benefits the trade as the trade continues to move in that direction; +Gamma = good hedge for the position

35
Q

Will gamma be higher or lower for an OTM long put after time has passed?

A

closer to zero

36
Q

Does time passing have an impact on Gamma?

A

Yes, Gamma changes with time and depending on OTM, ITM, or ATM the affects of time passing are different

37
Q

Will gamma be higher or lower for an OTM long put after time has passed?

A

closer to zero

38
Q

The most successful hedges have what type of gamma

A

those that are long large amounts of gamma

39
Q

What does a Vega of .25 indicate?

A

that the option price will increase $.25 when the volatility priced into the option rises 1%

40
Q

When the IV of the option decreases 1%, what will happen to the price of the option

A

The price of the option will decrease by the amount of the Option’s Vega

41
Q

Far OTM and ITM options are sensitive to changes in volatility? T or F

A

F: neither is very sensitive to changes in volatility

42
Q

How does Volatility affect ATM options as expiration approaches?

A

Volatility has a lesser affect on ATM options as expiration approaches;

43
Q

ATM options become more sensitive to changes in volatility as expiration approaches? T or F

A

F: ATM options become much less sensitive to changes in volatility as expiration approaches

44
Q

How does Volatility affect ATM options as expiration approaches?

A

Volatility has a lesser affect on ATM options as expiration approaches;

45
Q

It is possible for an options trader to generate a positive return without a reliable method for assessing volatility?

A

NO: An option trader MUST have a reliable method for assessing volatility in order to generate a positive return

46
Q

which single variable in the options pricing model does NOT have a precise known value?

A

Volatility

47
Q

Volatility derived from the past behavior of the underlying is _________

A

Historical Volatility

48
Q

volatility derived from the current price of the option is ________

A

Implied Volatility

49
Q

Volatility derived from the past behavior of the underlying is _________

A

Historical Volatility

50
Q

find the one week, 1SD price move for a $50 with 25% annual volatility

A

.25 * (sqrt of (1/52)) = .03466 * $50 = 1.73

51
Q

formula for a 1SD move for any given time period…

A

(annual volatility) * (sqrt of time period) * (price of underlying);

54
Q

Fair Volatility is…

A

the Trader’s assessment of Volatility independent of but after consideration of Implied Volatility and Historical Volatility

55
Q

How important is Fair Volatility to an Options trader?

A

It is nearly impossible to generate a positive return without a reliable method for assessing Fair Volatility

56
Q

Does an options pricing model exist that can accurately price options based on anticipated big market events seen or unforeseen?

A

No, Even the most refined option pricing models cannot anticipate earning surprises, hostile takeovers, stock buybacks, fraud, wars, trade embargoes, terrorist attacks, political events, etc

57
Q

Buying and selling options is tantamount to buying and selling…

A

Standard Deviations

58
Q

many traders fall into the trap of comparing price changes in ___________ rather than ___________.

A

Percentages rather than Standard Deviations

59
Q

Put and Call deltas are symmetrical. T of F?

A

False: Put and Call deltas are not symmetrical, related to the lognormal distribution

60
Q

Binomial Trees are…

A

An alternative option pricing model that extrapolate out all price movement possibilities to the 2^30 (1 billion) iteration to determine option pricing

61
Q

Advantage of Binomial Tree Pricing model to the Black-Scholes

A

the binomial model can be used to simulate the differences in Volatility change along with time and underlying price movement

62
Q

Cox-Ross-Rubenstein model, AKA…

A

Binomial Tree option pricing model

63
Q

number of trading days in a year

A

252

64
Q

Jeff will call a underlying “well behaved” if…

A

Well Behaved if the size and distribution of its price changes fit the normal distribution curve

65
Q

Jeff will call an underly “poorly behaved” if…

A

Poorly behaved: if its price change distribution curve has elongated tails with a surprising number of large spikes

66
Q

Jeff Augen will say that the principal goal of an option trader is to…

A

is to arbitrage subtle difference between implied and fair volatility by structuring positions that capitalize on those discrepancies

67
Q

In order to generate a profit, the underlying must rise or fall, more or less than the amount of volatility priced into the position/trade. T or F?

A

True, without taking advantage of mis-priced implied volatility, a consistent profit is unattainable according to Jeff Augen

68
Q

Jeff will advise that once the position volatility is fairly priced…

A

The trade becomes a direction bet

69
Q

volatility is mean-reverting. T or F?

A

True. If current Volatility is low, it tends to rise, and if it is high, it tends to fall.

70
Q

Decisions about structuring positions should take into account both the relative difference between _________ and ________ volatility and the trade’s ________________.

A

both the relative difference between implied and fair volatility and the trade’s time horizon.

71
Q

It is important to make sure that the time horizon of a structured position does not overlap with the…

A

next transition between the stock’s low and high volatility

Options (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions