Volatility Arbitrage with Options

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Presentation about Volatility Arbitrage Techniques using Options at the London Traders & Investors Club

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Volatility Arbitrage with Options

  1. 1. London Traders and Investors Club<br />Options Trading<br /> and<br /> Volatility Arbitrage<br />
  2. 2. Introduction<br />1 ) DEFINITIONS AND BASIC STRATEGIES<br />2) COMPLEX STRATEGIES<br />3) GREEK LETTERS<br />4) Q & A<br />
  3. 3. CALL/PUT OPTIONS<br /> THE BUYER /SELLER HAS THE RIGHT (BUT NOT THE OBLIGATION) TO BUY / SELL A SPECIFIED QUANTITY OF A SECURITY AT A SPECIFIED PRICE (STRIKE PRICE) WITHIN A FIXED PERIOD OF TIME (EXPIRATION)<br />
  4. 4. TYPES OF OPTIONS<br />AT THE MONEY<br />STRIKE PRICE OF THE OPTION<br />=<br />UNDERLYING ASSET PRICE <br />
  5. 5. TYPES OF OPTIONS<br />IN THE MONEY<br />UNDERLYING ASSET PRICE <br />IS ABOVE / BELOW<br />STRIKE PRICE OF THE OPTION<br />
  6. 6. TYPES OF OPTIONS<br />OUT OF THE MONEY<br />UNDERLYING ASSET PRICE <br />IS ABOVE / BELOW<br />THE OPTION’S STRIKE PRICE<br />
  7. 7. Long Call<br />
  8. 8. Short Call<br />
  9. 9. Long Put<br />
  10. 10. Short Put<br />
  11. 11. Complex Strategies<br />
  12. 12.
  13. 13. Long Strangle Construction<br />BUY 1 OTM CALL<br />BUY 1 OTM PUT<br />
  14. 14. Long Strangle <br /> SIGNIFICANT VOLATILITY OF THE UNDERLYING ASSET EXPECTED IN THE NEAR TERM<br />
  15. 15. Long Strangle<br />
  16. 16. Short Strangle Construction<br />SELL 1 OTM CALL<br />SELL 1 OTM PUT<br />
  17. 17. Short Strangle<br /> LITTLE VOLATILITY IN THE UNDERLYING ASSET EXPECTED IN THE NEAR TERM<br />
  18. 18. Short Strangle<br />
  19. 19. Long Straddle Construction<br />BUY 1 ATM CALL<br />BUY 1 ATM PUT<br />
  20. 20. Long Straddle<br /> SIGNIFICANT VOLATILITY EXPECETED IN THE NEAR TEARM<br />
  21. 21. Long Straddle<br />
  22. 22. Short Straddle Construction<br />SELL 1 ATM CALL<br />SELL 1 ATM PUT<br />
  23. 23. Short Straddle<br /> LITTLE VOLATILITY EXPERIENCED BY THE UNDERLYING IN THE NEAR TERM<br />
  24. 24. Short Straddle<br />
  25. 25. Butterfly Spread Construction<br />BUY 1 ITM CALL<br />SELL 2 ATM CALLS<br />BUY 1 ATM CALL<br />
  26. 26. Butterfly Spread<br /> THE UNDERLYING ASSET IS EXPECTED NOT TO FALL OR RISE MUCH BY EXPIRATION<br />
  27. 27. Butterfly Spread <br />
  28. 28. Greek Letters<br />
  29. 29. THETA<br />1) IT MEASURES THE SENSITIVITY OF AN OPTION TO TIME DECAY<br />2) IT TELLS HOW MUCH MONEY THE OPTION PRICE WILL LOSE FOR EVERY DAY THAT PASSES<br />
  30. 30. THETA<br />
  31. 31. THETA<br />LONG POSITION = YOU WANT NEGATIVE THETA VALUES<br />SHORT POSITION = YOU WANT POSITIVE THETA VALUES<br />
  32. 32. Delta<br /> IT MEASURES THE SENSITIVITY OF AN OPTION TO UNDERLYING ASSET PRICE MOVEMENTS<br />
  33. 33. Delta<br />
  34. 34. Delta<br />CALL OPTIONS HAVE POSITIVE DELTAS (0;1)<br />PUT OPTIONS HAVE NEGATIVE DELTAS (-1;0)<br />
  35. 35. Delta<br /> IF THE DELTA OF A CALL OPTION IS 0.75 IT MEANS THAT FOR EVERY 1 POINT MOVEMENT IN THE UNDERLYING ASSET THE OPTION PREMIUM WILL INCREASE BY 0.75<br />
  36. 36. VEGA<br /> PROBALY THE MOST IMPORTANT GREEK <br /> IT MEASURES THE SENSITIVITY OF AN OPTION TO THE UNDERLYING ASSET VOLATILITY FLUCTUATIONS<br />
  37. 37. Vega<br />
  38. 38. Vega<br />IF YOU SHORT A CALL / PUT = YOU WANT LOW VEGA VALUES<br />IF YOU LONG A CALL / PUT = YOU WANT HIGH VEGA VALUES<br />

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