Option Trading Lesson 2.8

What Is a Christmas Tree?

A Christmas tree is an options trading spread strategy achieved by buying and selling six call (or six put) options with different strikes but the same expiration dates for a neutral to bullish forecast. 

Long call Christmas tree when using calls options. 看升-聖誕樹

Long put Christmas tree when using put options. 看跌-聖誕樹

The strategy is also available long (bullish) or short (bearish).This spread is essentially the combination of a long vertical spread and two short vertical spreads.

The 1-3-2 structure supposedly appears as a tree. Time decay is on the holder's side, as the holder wants all options except the lowest to expire worthless.

For example, with the underlying asset at $100,

• Long Christmas Tree With Calls (LC 95x1, SC 105x3, LC 110x2) 傾向看升
• Long Christmas Tree with Puts (LP 105x1, SP 95x3, LP 90x2) 傾向看跌

Maximum profit equals middle strike minus higher strike minus the premium.

Maximum loss is the net debit paid for the strategy.

Short Christmas Tree with Calls (SC 95x1, LC 105x3, SC 110x2) 傾向看跌

Short Christmas Tree with Puts (SP 105x1, LP 95x3, SP 90x2) 傾向看升

The maximum profit is the net credit received.

留意commission 和手續費的開支，因為一次策略會牽涉六個期權 

Source: Investopedia

Option Trading Lesson 2.7

What Is double diagonal spread?

A double diagonal spread is made up of a diagonal call spread and a diagonal put spread. To run this strategy, you need to know how to manage the risk of early assignment on your short options.

I.e. Iron condor 但唔係同一個到期日

SC 110, SP 90 due on 7 Jan

LC 120, LP 80 due on 7 Mar

Typically, the stock will be halfway between 90 and 110 when you establish the strategy. If the stock is not in the center at this point, the strategy will have a bullish or bearish bias. You want the stock to remain between 90 and 110, so the options you’ve sold will expire worthless and you will capture the entire premium. 

The put and call you bought at 80 and 120 serve to reduce your risk over the course of the strategy in case the stock makes a larger-than-expected move in either direction. (擺一個短期龍門，買一個長期保險)

Once you’ve sold the additional options at strike 90 and 110 and all the options have the same expiration date, you’ll discover you’ve gotten yourself into a good old iron condor. 

The goal at this point is still the same as at the outset—you want the stock price to remain between strike 90 and 110. Ultimately, you want all of the options to expire out-of-the-money and worthless so you can pocket the total credit from running all segments of this strategy. (最終目的都係等收錢，LP and LC 只係一個長期保障)

Suggestion:

• Short weekly, Long 1 month
• Short bi-weekly, Long 2 months
• Short monthly, Long 3 months
  

Source: Options playbook

Option Trading Lesson 2.6

What Is a Diagonal Spread?

A diagonal spread (對等) is a modified calendar spread involving different strike prices. It is an options strategy established by simultaneously entering into a long and short position in two options of the same type—two call options or two put options—but with different strike prices and different expiration dates. (搬龍門，搬行權價和日期，兩者都變動)

Diagonal spreads allow traders to construct a trade that minimizes the effects of time, while also taking a bullish or bearish position. It is called a "diagonal" spread because it combines features of a horizontal (calendar) spread and a vertical (strike price) spread.

Types of Diagonal Spreads

Because there are two factors for each option that are different, namely strike price and expiration date, there are many different types of diagonal spreads. They can be bullish or bearish, long or short, and utilize either puts or calls. (任何看法、任何日期、 獲利來自時間消耗)

Typically, these are structured on a 1:1 ratio, and long vertical and long calendar spread results in a debit to the account. With diagonal spreads, the combinations of strikes and expirations will vary. 

Long diagonal spread is generally put on for a debit .

Short diagonal spread is set up as a credit.

However, many traders "roll" the strategy (轉倉), replacing the expired option with an option with the same strike price but with the expiration of the longer option (or earlier).

Example:

Call:
SC 110, due on 7 Jan: LC 120, due on 7 Mar (Debit premium)

LC 110, due on 7 Jan: SC 120 due on 7 Mar (Credit premium)

Put:

SP 90, due on 7 Jan: LP 80, due on 7 Mar (Debit premium)

LP 90, due on 7 Jan: SP 80 due on 7 Mar (Credit premium)

Source: Options playbook

Option Trading Lesson 2.5

What Is a Butterfly Spread?

A butterfly spread is an options strategy combining bull and bear spreads, with a fixed risk and capped profit. (蝶式價差)

Butterfly spreads use four option contracts with the same expiration but three different strike prices. A higher strike price, an at-the-money strike price, and a lower strike price. The options with the higher and lower strike prices are the same distance from the at-the-money options. 

Each type of butterfly has a maximum profit and a maximum loss.

Puts or calls can be used for a butterfly spread. Combining the options in various ways will create different types of butterfly spreads, each designed to either profit from volatility or low volatility.

Long Call Butterfly Spread (LC 95, SC 100 x2, LC 105)

Net debt is created when entering the trade.

Long Put Butterfly Spread (LP 105, SP 100 x2, LP 95)

Net debt is created when entering the position.

Short Call Butterfly Spread (SC 95, LC 100 x2, SC 105)

A short butterfly spread with calls is the strategy of choice when the forecast is for a stock price move outside the range of the highest and lowest strike prices. (股價大升). The maximum profit for the strategy is the premiums received.

Short Put Butterfly Spread (SP 105, LP 100 x2, SP 95)

A short butterfly spread with puts realizes its maximum profit if the stock price is above the higher strike or below the lower strike on the expiration date. The forecast, therefore, must be for "high volatility, (高於市場SP買貨 or 股價大跌). The maximum profit for the strategy is the premiums received.

Iron Butterfly Spread (LP 95, SP 100, SC 100, LC 105)

The result is a trade with a net credit that's best suited for lower volatility scenarios. The maximum profit occurs if the underlying stays at the middle strike price.

Reverse Iron Butterfly Spread (SP 95, LP 100, LC 100, SC 105)

This creates a net debit trade that's best suited for high-volatility scenarios. Maximum profit occurs when the price of the underlying moves above or below the upper or lower strike prices.

Option Trading Lesson 2.4

What Is an Iron Condor?

An iron condor is an options strategy consisting of two puts (one long and one short) and two calls (one long and one short), and four strike prices, all with the same expiration date. 

The iron condor strategy has limited upside and downside risk because the high and low strike options, the wings, protect against significant moves in either direction. Because of this limited risk, its profit potential is also limited.

LC 110, SC 105, SP 95, LP 90

The options that are further OTM, called the wings, are both long positions. Because both of these options are further OTM, their premiums are lower than the two written options, so there is a net credit to the account when placing the trade. 

龍門 (95-105)外再每一邊加一個網 (LC 110, LP 90)

The options that are further OTM, called the wings, are both long positions. Because both of these options are further OTM, their premiums are lower than the two written options, so there is a net credit to the account when placing the trade. 

Iron Condor Profits and Losses

The maximum profit for an iron condor is the amount of premium, or credit, received for creating the four-leg options position.

The maximum loss is also capped. The maximum loss is the difference between the long call and short call strikes, or the long put and short put strikes. Reduce the loss by the net credits received, but then add commissions to get the total loss for the trade.

Option Trading Lesson 2.3

What Is a Strangle?

A strangle is an options strategy in which the investor holds a position in both a call and a put option with different strike prices, but with the same expiration date and underlying asset.

A strangle is a good strategy if you think the underlying security will experience a large price movement in the near future but are unsure of the direction. However, it is profitable mainly if the asset does swing sharply in price. (Set 龍門)

How Does a Strangle Work?

Strangles come in two forms:

Long strangle (LC 105, LP 95)

Investor simultaneously buys an out-of-the-money call and an out-of-the-money put option. The call option's strike price is higher than the underlying asset's current market price, while the put has a strike price that is lower than the asset's market price. 

This strategy has large profit potential since the call option has theoretically unlimited upside if the underlying asset rises in price, while the put option can profit if the underlying asset falls. The risk on the trade is limited to the premium paid for the two options. (買刀仔，鋸大樹)

Short strangle (SC 105, SP 95)

Investor simultaneously sells an out-of-the-money put and an out-of-the-money call. This approach is a neutral strategy with limited profit potential. 

A short strangle profits when the price of the underlying stock trades in a narrow range between the breakeven points. The maximum profit is equivalent to the net premium received for writing the two options, less trading costs. (兩手準備，一手現金一手貨，賣合約收錢)

Option Trading Lesson 2.2

What Is a Straddle?

More broadly, straddle strategies in finance refer to two separate transactions which both involve the same underlying security, with the two component transactions offsetting one another. Investors tend to employ a straddle when they anticipate a significant move in a stock's price but are unsure about whether the price will move up or down.

How do you earn a profit in a straddle?

To determine how much an underlying security must rise or fall in order to earn a profit on a straddle, divide the total premium cost by the strike price.

Assume: Stock XYZ current market price is $100, 持有股票= 有貨

• Long Straddle (LP 100, LC 100)

A long straddle (同價錢、同到期日，升跌兩邊買晒) is an options strategy where the trader purchases both a long call and a long put on the same underlying asset with the same expiration date and strike price. (投資者認為到期日價錢不會停留在$100)

Theoretically, this strategy allows the investor to have the opportunity for unlimited gains. At the same time, the maximum loss this investor can experience is limited to the cost of both options contracts combined. 

This makes it much more difficult for traders to profit from the move because the price of the straddle will already include mild moves in either direction. If the anticipated event does not generate a strong move in either direction for the underlying security, then options purchased likely will expire worthless, creating a loss for the trader. (如果股價唔夠波動，便會造成損失)

• Short Straddle (SP 100, SC 100)

Short straddles are when traders sell a call option and a put option at the same strike and expiration on the same underlying. A short straddle profits from an underlying lack of volatility in the asset's price.

Premiums are collected when the trade is opened with the goal to let both the put and call expire worthless. However, chances that the underlying asset closes exactly at the strike price at the expiration are low, and that leaves the short straddle owner at risk for assignment. 

They are generally used by advanced traders to bide time. (投資者認為到期日價錢會停留在$100)

Source: Investopedia

 

Option Trading Lesson 2.1

What Is a Spread?

One of the uses of the bid-ask spread is to measure the liquidity of the market and the size of the transaction cost of the stock.  (流動性與成交量)

• In finance, a spread refers to the difference between two prices, rates or yields.
• One of the most common types is the bid-ask spread (買賣差價) ,which refers to the gap between the bid (from buyers) and the ask (from sellers) prices of a security or asset
• Spread can also refer to the difference in a trading position – the gap between a short position and a long position.

Spreads are priced as a unit or as pairs in future exchanges to ensure the simultaneous buying and selling of a security. Doing so eliminates execution risk wherein one part of the pair executes but another part fails.

Assume: Stock XYZ current market price is $100, 持有股票= 有貨

Vertical Spread

1. Bull Call Spread (LC 100, SC 110)
2. Bear Put Spread (SP 100, LP 90)

What Is a Box Spread?

A box spread is an options arbitrage strategy that combines buying a bull call spread with a matching bear put spread. In other words, buy an ITM call and put and then sell an OTM call and put.

(SC 105, LC 95, LP 105, SP 95)

Credit spreads vs Debit spreads

Example of Debit spreads

Conversely, a debit spread—most often used by beginners to options strategies—involves buying an option with a higher premium and simultaneously selling an option with a lower premium, where the premium paid for the long option of the spread is more than the premium received from the written option. (LC 105, SC 110)

Unlike a credit spread, a debit spread results in a premium debited, or paid, from the trader's or investor's account when the position is opened. Debit spreads are primarily used to offset the costs associated with owning long options positions. (LP 95, SP 90)

Example of Credit spreads:

A bearish trader (不如直接做LP) expects stock prices to decrease, and, therefore, buys call options (long call) at a certain strike price and sells (short call) the same number of call options within the same class and with the same expiration at a lower strike price.  (LC 100, SC 95)

In contrast, bullish traders (不如直接做LC) expect stock prices to rise, and therefore, buy call options at a certain strike price and sell the same number of call options within the same class and with the same expiration at a higher strike price. (LC 100, SC 105)

Source: Investopedia

Option Trading Lesson 2.0

There are many options strategies that both limit risk and maximize return. With a little effort, traders can learn how to take advantage of the flexibility and power that stock options can provide. Here are 10 options strategies that every investor should know.

Assume: Stock XYZ current market price is $100, 持有股票= 有貨

• 有錢 SP 90
• 有貨 SC 110
• Covered call 有貨XYZ止賺(SC 110)
• Married Put 有貨XYZ買保險(LP 90)
• Protective Collar (SP 90, LC 110)

A protective collar strategy is performed by purchasing an out-of-the-money put option and simultaneously writing an out-of-the-money call option. The underlying asset and the expiration date must be the same.

Source: Investopedia

Option Trading Lesson 1.6

What is an Option Cycle?

Option cycle refers to the expiration dates that apply to the different classes of options.

For example:
大型股票AAPL, MSFT, TSLA通常每個星期五結算
Index SPY, QQQ 逢星期一、三、五結算

There are three option cycles that a listed option can be assigned to on the public markets:

• JAJO - January, April, July, and October
• FMAN - February, May, August, and November
• MJSD - March, June, September, and December

What Are Long-Term Equity Anticipation Securities (LEAPS)?

As with all options contracts, a LEAPS contract grants a buyer the right, but not the obligation, to purchase or sell (depending on if the option is a call or a put, respectively) the underlying asset at the predetermined price on or before its expiration date.

I.e. 一年至三年的超長合約

As with many short-term options contracts, investors pay a premium, for the ability to buy or sell above or below the option's strike price. The strike is the decided upon price for the underlying asset at which it converts at expiry.

Pros

• Long timeframe allows selling of the option
• Used to hedge a long-term holding or portfolio
• Available for equity indices
• Prices less sensitive to the movement of the underlying or to the passage of time.
  

Cons

• Costlier premiums (高保費)
• Long time frame ties up the investment dollars (扎住咗啲錢)
• Markets or companies movements may be adverse
• Prices more sensitive to changes in volatility and interest rates.

Premiums are the non-refundable cost associated with an options contract. The premiums for LEAPS are higher than those for standard options in the same stock because the further out expiration date gives the underlying asset more time to make a substantial move and for the investor to make a healthy profit. 

Without LEAPS, investors who wanted a two-year option would have to buy a one-year option, let it expire, and simultaneously purchase a new one-year options contract.

Source: Investopedia

Option Trading Lesson 1.5

What Is an Interest Rate?

• The interest rate is the amount charged on top of the principal by a lender to a borrower for the use of assets.
• Consumer loans typically use an APR, which does not use compound interest.

When the borrower is considered to be low risk by the lender, the borrower will usually be charged a lower interest rate. 

If the borrower is considered high risk, the interest rate that they are charged will be higher, which results in a higher cost loan.

Annual percentage rate (APR) 

The annual rate charged for borrowing or earned through an investment. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income earned on an investment. 

Annual percentage yield (APY) 

The actual rate of return that will be earned in one year if the interest is compounded, simply the % of growth in an investment over a specific period of time.

• Compound interest is added periodically to the total invested, increasing the balance. That means each interest payment will be larger, based on the higher balance.
• The more often interest is compounded, the better the return will be.

The formula for calculating APY is:

APY= (1 + r/n )n – 1

Where:

• r = period rate 
• n = number of compounding periods

For example, if you deposited $100 for one year at 5% interest and your deposit was compounded quarterly, at the end of the year you would have $105.09. If you had been paid simple interest, you would have had $105.

The APY would be (1 + .05/4)4 - 1 = .05095 = 5.095%.

It pays 5% a year interest compounded quarterly, and that adds up to 5.095%. That's not too dramatic. However, if you left that $100 for four years and it was being compounded quarterly then the amount your initial deposit would have grown to $121.99. Without compounding it would have been $120.

X = D(1 + r/n)^n*y

= $100(1 + .05/4)^4*4

= $100(1.21989)

= $121.99

where:

• X = Final amount
• D = Initial Deposit
• r = period rate 
• n = number of compounding periods per year
• y = number of years

How Can APY Assist an Investor?

Any investment is ultimately judged by its rate of return, whether it's a certificate of deposit, a share of stock, or a government bond. 

What Is the Difference Between APY and APR?

APY and APR are both standardized measures of interest rates expressed as an annualized percentage rate.

APY takes into account compound interest while APR does not. Furthermore, the equation for APY does not incorporate account fees, only compounding periods. That's an important consideration for an investor, who must consider any fees that will be subtracted from an investment's overall return.

Source: Investopedia

Option Trading Lesson 1.4

What Is Gamma?

Gamma (Γ) represents the rate of change between an option's delta and the underlying asset's price. This is called second-order (second-derivative) price sensitivity. Gamma indicates the amount the delta would change given a $1 move in the underlying security. 

Gamma is used to determine how stable an option's delta is: 

• Higher gamma values indicate that delta could change dramatically in response to even small movements in the underlying's price.
• Gamma values are generally smaller the further away from the date of expiration; options with longer expirations are less sensitive to delta changes.
• As expiration approaches, gamma values are typically larger, as price changes have more impact on gamma.

For example, assume an investor is long one call option on stock XYZ. The call option has a delta of 0.50 and a gamma of 0.10. Therefore, if stock XYZ increases or decreases by $1, the call option's delta would increase or decrease by 0.10.

What Is Vega?

Vega (v) represents the rate of change between an option's value and the underlying asset's implied volatility. (隱含波動率之間的變化率)

This is the option's sensitivity to volatility. (波動率越大會導致期權價值越大，相反波動率越小，期權價值越小)

Vega indicates the amount an option's price changes given a 1% change in implied volatility. For example, an option with a Vega of 0.10 indicates the option's value is expected to change by 10 cents if the implied volatility changes by 1%.

What Is Rho?

Rho (p) represents the rate of change between an option's value and a 1% change in the interest rate. This measures sensitivity to the interest rate. 

For example, assume a call option has a rho of 0.05 and a price of $1.25. If interest rates rise by 1%, the value of the call option would increase to $1.30, all else being equal. 

The opposite is true for put options. Rho is greatest for at-the-money options with long times until expiration.

Source: Investopedia

Option Trading Lesson 1.3

The primary Greeks (Delta, Vega, Theta, Gamma, and Rho) are calculated each as a first partial derivative of the options pricing model.

What Is Delta?

Delta (Δ) represents the rate of change between the option's price and a $1 change in the underlying asset's price. Delta values can be positive or negative depending on the type of option. 

Call option delta- always ranges from 0 to 1 because as the underlying asset increases in price, call options increase in price.

Put option delta- always range from -1 to 0 because as the underlying security increases, the value of put options decrease.

• Delta expresses the amount of price change a derivative will see based on the price of the underlying security (e.g., stock).
• Delta spread is an options trading strategy in which the trader initially establishes a delta neutral position by simultaneously buying and selling options in proportion to the neutral ratio.
• The most common tool for implementing a delta spread strategy is a calendar spread, which involves constructing a delta neutral position using options with different expiration dates.

For example, if a stock option has a delta value of 0.65, this means that if the underlying stock increases in price by $1 per share, the option on it will rise by $0.65 per share, all else being equal.

What Is Theta?
Theta (Θ) represents the rate of change between the option price and time, or time sensitivity - sometimes known as an option's time decay. Theta indicates the amount an option's price would decrease as the time to expiration decreases, all else equal.

• Theta increases when options are at-the-money, and decreases when options are in- and out-of-the money. 
• Options closer to expiration also have accelerating time decay. 
• Long calls and long puts will usually have negative Theta; 
• Short calls and short puts will have positive Theta.

Theta increases when options are at-the-money, and decreases when options are in- and out-of-the money. Options closer to expiration also have accelerating time decay. Long calls and long puts will usually have negative Theta; short calls and short puts will have positive Theta.

Source: Investopedia