41 lines
2.4 KiB
Plaintext
41 lines
2.4 KiB
Plaintext
It’s All About Volatility
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What are Kim and Mick really trading? Volatility. The motivation for
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buying an option as opposed to buying or shorting the stock is volatility. To
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some degree, these options have exposure to both flavors of volatility—
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implied volatility and historical volatility (HV). The positions in each of the
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examples have positive vega. Their values are influenced, in part, by IV.
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Over time, IV begins to lose its significance if the option is no longer close
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to being at-the-money.
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The main objective of each of these trades is to profit from the volatility
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of the stock’s price movement, called future stock volatility or future
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realized volatility. The strategies discussed in this chapter are contingent on
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volatility being one directional. The bigger the move in the trader’s
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forecasted direction the better. Volatility in the form of an adverse
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directional move results in a decline in premium. The gamma in these long
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option positions makes volatility in the right direction more beneficial and
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volatility in the wrong direction less costly.
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This phenomenon is hardly unique to the long call and the long put.
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Although some basic strategies, such as the ones studied in this chapter,
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depend on a particular direction, many don’t. Except for interest rate
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strategies and perhaps some arbitrage strategies, all option trades are
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volatility trades in one way or another. In general, option strategies can be
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divided into two groups: volatility-buying strategies and volatility-selling
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strategies. The following is a breakdown of common option strategies into
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categories of volatility-buying strategies and volatility-selling strategies:
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Volatility-Selling Strategies Volatility-Buying Strategies
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Short Call, Short Put, Covered Call, Covered Put,
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Bull Call Spread, Bear Call Spread, Bull Put
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Spread, Bear Put Spread, Short Straddle, Short
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Strangle, Guts, Ratio Call Spread, Calendar,
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Butterfly, Iron Butterfly, Broken-Wing Butterfly,
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Condor, Iron Condor, Diagonals, Double Diagonals,
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Risk Reversals/Collars.
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Long Call, Long Put, Bull Call Spread, Bear
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Call Spread, Bull Put Spread, Bear Put Spread,
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Long Straddle, Long Strangle, Guts, Back
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Spread, Calendar, Butterfly, Iron Butterfly,
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Broken-Wing Butterfly, Condor, Iron Condor,
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Diagonals, Double Diagonals, Risk
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Reversals/Collars.
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Long option strategies appear in the volatility-buying group because they
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have positive gamma and positive vega. Short option strategies appear in |