Options Implied Volatility (IV)

Implied Volatility forms one of the significant components of an option's premium(the price of an option)

Implied Volatility (IV) is simply a measure of the current level of risk of a stock option. It is sometimes compared with its historical volatility (HV) to determine whether this level has risen or has been down lately. Naturally, when IV is high, an option premium is higher (since it has a higher probability of going into-the-money) and when IV is lower, the option premium is cheaper. But IV is only part of the option premium component, the option's premium can still be affected by other components like share price, strike price, time until option expiration, interest rate, dividend yield.

You can verify any options implied and historical volatility at The Chicago Board Options Exchange.

What would cause the implied volatility of an option to increase? Usually it's due to an anticipated event which is going to affect the stock price very significantly in the near future. This event could be an upcoming earnings or guidance announcement, a potential takeover bid, upcoming FDA results for a company's drug submission etc. The implied volatility of the stock option, whether it's a put or call, would gradually increase as the significant event draw nearer.

You might be puzzled why you have bought a call option on the eve of an event announcement, the outcome turned out to be positive and the share price subsequently moved up a few points but your call option still lose money. This was because usually after an event has occurred, the option's implied volatility would return to its normal value after reaching an extreme (known as mean reverting) and the option premium would drop dramatically due to this reduction in implied volatility. The only way for this option position to be profitable would be if the stock price made a substantial price movement in your anticipated direction and the stock option you've bought gained plenty of intrinsic value. Don't forget that your option premium would also have time value if there's still some time before expiration.

There are options traders who would buy an option a few days before the announcement of an anticipated event and would quickly sell them on the eve of the announcement because the implied volatility would usually be inflated towards the announcement date & options premium would be highest during that time. That is why you sometimes hear about buying options when implied volatility are low and selling them when implied volatility are high.

It is important to do some research to find out why a stock option has sudden built-up of implied volatility. A little investigation would prevent you from suffering losses buying/selling stock options at the wrong price and at the wrong time.

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What Is Options Trading?

An option contract is an agreement between two parties to buy/sell an asset (In this case, the asset refers to stock) at a certain price and specific date.
It is called an option because the buyer is not obliged to carry out the transaction. If, over the life of the contract, the asset value decreases, the buyer can simply elect not to exercise his/her right to buy/sell the asset.
There are two types of option contracts - Call options and Put options. A Call option gives the buyer the right to buy the underlying asset, while a Put option gives the buyer the right to sell the underlying asset.

A simple example: Peter buys a Call option contract from Sarah. The contract states that Peter will buy 100 Microsoft shares from Sarah on the 5th May for $25. The current share price for Microsoft is $30.

Note: this is an example of a Call option as it gives Peter the right to buy the underlying asset.
If the share price of Microsoft is trading above $25 on the 5th May, then Peter will exercise the option and Sarah will have to sell him Microsoft shares for $25. With Microsoft trading anywhere above $25 Peter can make an instant profit by taking the shares from Sarah at the agreed price of $25 and then selling the shares on the open market for whatever the current share price is and making a profit.

The $25 value, which is stated in the agreement, is referred to as the Exercise (or Strike) Price. This is the price at which the asset will be exchanged.
The date (in this case 5th May) is known as the Expiry (or Maturity) Date. This date is the deadline for the option contract. At this date, the option buyer is to decide if a transaction of the underlying asset is to occur.

Outcomes: Let's imagine that at the expiration date, Microsoft is trading at $30, then Peter will buy the shares from Sarah at the agreed $25 and then he can sell them back on the open market for $30 and make an instant $5.

Alternatively, if Microsoft is trading at $20, then buying the shares from Sarah at $25 is too expensive as he can buy them on the open market for $20 and save $5. In this situation, Peter would choose not to exercise his right to buy the shares and let the options contract expire worthless. His only loss would be the amount that he paid to Sarah when he bought the contract, which is called the Option Premium - more on that a little later. Sarah would, however, keep the option premium received from Peter as her profit.

All in all, there are more than 50 strategies you can deploy in options trading by combining many different strike prices and expiration. But do you need to know all?

The good news is you do not have to!In fact, most of them allow you to make money very slowly or limited.

By : Andy Poon

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Stock Market Terminology

Stock Market terms can be intimidating for the novice, and Stock Options can be even more difficult to grasp. Understanding stock market terms is the first step in stock market eduction. It will allow you to understand all the information on this site. Consider it as a dictionary or a glossary of the most common stock market terms related to stock and options trading. It will be updated regularly and you can leave comments on which stock market terms you wish to be included.


Bearish a view someone has where they are expecting the stock market, or a stock price to fall.

Bullish a view someone has where they are expecting the stock market, or a stock price to rise.

Neutral is a view someone has where they are neither bearish or bullish. There are options trading strategies suited to this, requiring little or no movement.



Stock Options give the holder the right to buy or sell particular shares at a fixed pre-determined price within a fixed period of time. Stock options can be traded in the same way that the underlying stock can be bought and sold.

Underlying Security is the stock that an option taker has the right to buy or sell if they choose to exercise.

Some terms that relate to the mechanics of stock options:

Call Options give the holder the right to buy the underlying stock at a fixed pre-determined price within a certain, fixed period of time.

Put Options give the holder the right to sell the underlying stock at a fixed pre-determined price within a certain, fixed period of time.

Strike price This is the fixed, pre determined price at which you can buy or sell the shares. This cannot be changed throughout the life of the option contract.

Expiry This is the date at which the option contract expires. This cannot be changed throughout the life of the option, and there after the contract is worthless.

Exercise The process of fulfilling the put option contract and buying or selling the shares. This can be done any time up to and including the option expiry date.

Premium The amount you pay for the option contract. Each stock has set strike prices for trading. Depending on where the strike price is in relation to the current share price, influences the amount you pay. Premium is the sum of both the options intrinsic value and time value.

Contract Size The amount of underlying stock covered by an option contract. In the U.S this is 100 shares, and Australia it is 1,000 shares. This can vary at times. A broker is able to confirm this for you.

Writer is a trader or investor who sells an option.

Taker is a trader or investor who buys an option contract.

Some terms that relate to the pricing and values of stock options:

At the Money when an options strike price is the same as the current stock price, it is said to be at the money.

In the Money A call option is in-the-money when the underlying stock price is higher than the strike price of the call, and a put option is in-the-money when the stock price is below the strike price. The option would have intrinsic value.

Out of the Money A call option is out-of-the-money when the stock price is below the strike price, and a put option is out-of-the-money when the stock price is higher than the strike price. The option would have no intrinsic value.

Intrinsic Value is the difference between the current stock price and the strike price. This is the amount by which an option is in the money, and indicates the value of an option if it were to expire right now.

Time Value is the difference between an options current value and the intrinsic value.

Time Decay Options are made up of time value and intrinsic value. As you get closer to the expiry date, the option value diminishes. This is called time decay. When you buy an option, you are buying time.

Fair Value is used to describe the value of an option as calculated by a mathematical model. Also used to indicate intrinsic value.

Theoretical Value The price of an option as calculated by a mathematical model.

Overvalued describes a stock trading at a higher price than it logically should.

Undervalued describes a stock that is trading at a lower price than it logically should.

Some terms you will hear when dealing with a stock broker:

Full Service Broker is a broker you deal directly with to execute all transactions and orders. They come with higher fees, but highly recommended when you begin trading.

Online Broker many broking firms offer an online trading platform that allows you to control your orders with the click of a mouse. The fees are usually a fraction of the full service brokers.

Discount Broker is a brokerage firm that offers low commission rates.

Ask Price is the price at which an option seller (writer) is willing to sell. We buy option contracts and stocks on their ask price.

Bid Price is the price at which an option buyer (taker) is willing to buy.

Bid/Ask Spread is the difference in price between the bid and ask price of an option contract. Option contracts that are highly traded (liquid) tend to have a tighter Bid/Ask Spread and option contracts that are thinly traded (less liquid) have a wider Bid/Ask Spread.

Buy to Open is an order in option trading to open a position through buying that option contract. You are said to be long that option.

Sell To Close is an order close an open position through selling that option contract. This really means you are selling an option contract that you own.

Sell To Open is an order to open a position by selling (writing) an option contract to a buyer. You are said to have short sold that option.

Buy To Close is an order to close your position. It simply means you are buying back an option contract that you have previously sold short.

Closing Order is an order placed to close an open position, whether it be a sell to close or a buy to close order.

Market Order is an order to buy or sell options at the current market price.

Limit Order an order to buy or sell options at a certain, or limited price.

Day Order an order that expires at the end of the trading day if it is not filled.

Good Until Canceled is an order that remains effective until it is cancelled or filled.

Leg in option trading strategies that involve many kinds of options, each type is known as a leg.

Long to be long is to own something.

Short to be short means to sell (or write) an options contract to a buyer. This means you have the obligation to fulfill the exercise of the option should the buyer decides to do so.

Naked Option or Uncovered Option is where the investor who wrote, or sold the option does not own the underlying security.

Position used to describe the number and strategy currently open. i.e if you had bought 12 Nov $ 20 call option contracts you would be long 12 XYZ Nov $ 20 calls.

Early Exercise is the exercise of an option contract before its expiry date.

Day trading is the process of making multiple trades that are opened and closed all within the same trading day.

Short Term Options Trading to buy and onsell stock options for profit within a period of time no more than 4 weeks in total.

Some things that may affect our decisions when to enter or exit a position:

Technical Analysis is the study of price movements on a companies stock chart in order to form an opinion of future possible price movements.

Fundamental Analysis is the study of a companies financial details to form an opinion as to the future share price movements.

Trend the direction of a stock or index price movement.

Support is a term in technical analysis indicating a price level, or floor, lower than the current price of the stock, where demand is thought to exist. This indicates that the stock may stop declining when it reaches this level.

Resistance is a term used in technical analysis to recognise a price level, or ceiling, that is higher than the current stock price and where the stock has previously traded and failed to break through.

Liquidity is the ease at which a purchase or sale can be made. Highly traded stocks have better liquidity.

Reward / Risk Ratio is a measure of how risky a position would be. Divide the maximum profit potential against the maximum loss potential, and a ratio of above 1 means that the potential reward is higher than the potential loss.

Return on Investment is the percentage of profit that you may or may not make on an investment.

Open Interest is the total number of outstanding open contracts in a particular option series. Opening transactions increase the open interest, while a closing transaction reduces it.

Volatile a stock market or stock price that moves up or down unexpectedly or drastically is known as volatile.

Volatility is a measure of the amount by which an underlying stock is expected to vary or fluctuate in a given period of time.

Volume refers to the number of transactions that took place in a trading day. This indicates the number of buyers and sellers in the market.

Stop Loss is a pre-determined price at which you have decided to exit a position once it is hit.

Stop Order is a traditional stop loss where your broker will close a position when a predetermined price is hit.

And afterwards

Realise once you have closed an open position you will realise a profit or loss.

Powerful tools to help increase your profits, but take caution:

Leverage is the power to achieve greater profit potential with a smaller amount of money. Options offer high leverage. Beware leverage can be powerful, but your potential losses could also be greater.

Margin Loan is to buy a stock through borrowing funds from a brokerage house. The stock itself is used as security, and each stock has a maximum loan ratio.

Margin Call is when the lender requests additional funds as security from the borrower in the event that the stock price has fallen below a certain amount.

And a few strays:

Derivatives are financial instrument whose value is derived in part from the value and characteristics of another financial instrument. Stock Options are derivatives of the stock they correlate to.

Index is a compilation of the prices of several common entities into a single number, such as the S&P 500 and the Dow Jones.

Index Option is an option whose underlying security is an index. Generally index options are cash-based.

Market Maker is a member of the exchange whose purpose is to aid in the making of a market, by making bids and offers when there are no public buy or sell orders.

Greeks are a set of mathematical criteria used to calculate stock option prices.

Hedge to protect against potential losses.

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Stock Trade Performance

I have included a stock trade performance table that should refresh in real-time. On the first row is the options position opened on the 23rd of July. On the second row, I include an equivalent trade by shorting the stock itself to demonstrate the difference in performance.

In one day, the options trade has realized a gain of 9.40%, where as the stock trade has only realized a gain of 0.77 % for the same stock price movement of $1.28.

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Goldman sachs October PUTS position opened at $1.17

Alert was raised at 165$ today. As planned i bought some October puts at a strike price of 120. Entry price $1.17. According to chart we should see a 20$ drop in the near future


120.00 GSVD.X 1.17 Down 0.29 1.16 1.20

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What To Know When Considering Trading Options

If you desire to rise above simply buying and selling stocks outright, you should look into trading options. Before you do, however, it is important to understand the rules related to stock options trading. Unlike buying and selling stocks outright, with options you are leveraging the amount of stock you can purchase. This creates additional risks of which you must understand and be aware before engaging in option trading.
Trading options allows you to react strategies that are not feasible with grow trading exclusive. An choice trading strategy should represent use of these different strategies to add further gain possible to your portfolio as source as to add an halogen of contract to your portfolio. A combination of these two factors allows you to put options to the uncomparable use.


When you how to use the first one is to understand what are the alternative options to consider. An option the right to buy or sell a set number of stock for a price has set a time limit. Generally, an option contract on the right to buy or sell 100 shares from the date of termination will give it. If the price of your option towards the end does not move ended in vain.
The benefit to options is that they founder you a far greater honor of leverage as compared to unelaborate old stocks. With an alternative you can typically buy in for a fraction of the soprano of the underlying soup. The risk is that dissimilar stocks, which rarely go to adjust, you do run a sincere assay of losing all of your money if the stocks respire on the wrongheaded itinerary of the terms locomote you are indulgent on.
Over and above trading options directly, you can also purchase or sell options against your stock position on hand. Selling a call at a cost more than your stock price will generate earnings from your stock position. In case of a fall in stock price, buying at a rate below your stock price will ensure protection.
Options provide an excellent tool to augment regular stock trading. Take some time to learn about this valuable tool and you can enhance your returns. Options can be used in many different ways and you will greatly enhance your trading sophistication once you learn how to use them.

If you are looking to broaden your horizons in terms of investments, consider trading options as one of your opportunities। First you must become familiar with the basics of options. They are flexible, but require a strong understanding of their possible uses before you begin to use them.

By: David Baxwell

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Another up day for the markets. The Dow,Nasdaq and S&P 500 are up on average of 1.2% today, fueled by the earnings hype. Things will surely cool down after earnings as they do every year.

The outlook of the economy is not as bleak as it was 6 months ago. Intel's forward estimates are very uplifting, and will bring alot of cash in-flow in the technology sector. The month of september will be when i will start looking at good entry points for the following companies : Vmware, Intel, Cisco and Google.

For now till September i am looking for entry points to short stocks. The stock i'm most comfortable is the one i've been following, Goldman Sachs (GS). Today it topped 160$ up another 3$ (2%), on it's way to 165 ! Holding tight and ready to pounce on those October PUTS :

115.00	GSVC.X	1.25	0.50	1.16	1.21	28	1,633
120.00	GSVD.X	1.56	0.74	1.53	1.59	269	3,025

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Goldman sacks - GS getting ready to short

I've been waiting patiently to short Goldman Sacks. Earning reports came out this week, and as they say sell on news. The following chart is showing resistance in the 150 area, and it broke through yesterday. GS might have some legs and top 160-165, which is the top of the bollinger band, which i think is an ideal time to short, for a 10 point spread.


I'm waiting until this weeks options expiration and will buy some October 2009 115 puts, which are currently trading at 1.90$.

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ONLINE STOCK TRADING

Online Stock and Stock options Trading is not as complicated as it sounds. All you need is an account at an online brokerage, like ETRADE, and some cash. You don't need alot of money to get started. A few hundred dollars is enough to make your first trade. I will show you in following posts how to maximize your gains through stock options.

Once you have your online brokerage account set up, you need to find a stock (a company to follow) I have chosen, and been following GS Goldman Sachs for almost a year now.

A few days ago i mentioned that I was waiting for GS to rise to 140$, and once there to short it.
Betting that the stock will lower in price. This morning it is approaching 130$. That's a 10$ gain :)

Now that's only 8% or so, but not bad in 3 days ! These could of been 80% had i bought the stock option PUTS, i mentioned a week or 2 ago !!!!!!

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ORACLE BUYS SUN

What are your thoughts on this takeover ? Will Oracle kill off mysql ?
I give Oracle between 3-5 years to selloff the hardware portion !

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Banks and techs lead Wall Street lower

Banks and techs lead Wall Street lower

This might be it. gettin ready to short ...

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On all fronts, Nasdaq, DOW, and S&P traded flat today.

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Stock Market History

History of stock market trading in the United States can be traced back to over 200 years ago. Historically, The colonial government decided to finance the war by selling bonds, government notes promising to pay out at profit at a later date. Around the same time private banks began to raise money by issuing stocks, or shares of the company to raise their own money. This was a new market, and a new form of investing money, and a great scheme for the rich to get richer. A little futher on the history tumeline, more specifically in 1792, a meeting of twenty four large merchants resulted into a creation of a market known as the New York Stock Exchange(NYSE). At the meeting, the merchants agreed to meet daily on Wall Street to daily trade stocks and bonds.

Further in history, in the mid-1800s, United States was experiencing rapid growth. Companies needed funds to assist in expansion required to meet the new demand. Companies also realized that investors would be interested in buying stock, partial ownership in the company. History has shown that stocks have facilitated the expansion of the companies and the great potential of the recently founded stock market was becoming increasingly apparent to both the investors and the companies.

By 1900, millions of dollars worth of stocks were traded on the street market. In 1921, after twenty years of street trading, the stock market moved indoors.

History brought us the Industrial Revolution, which also played a role in changing the face of the stock market. New form of investing began to emerge when people started to realize that profits could be made by re-selling the stock to others who saw value in a company. This was the beginning of the secondary market, known also as the speculators market. This market was more volatile than before, because it was now fueled by highly subjective speculation about the company’s future.

This was the pretext for appearance of such stock market giants as NYSE. History books tell us that the reason the NYSE is so highly regarded among stock markets was primarily because they only trade in the very large and well-established companies. It acted as a more stable investment alternative, for people interested in throwing their capital into the stock market arena. The smaller companies making up the stock market formed into what eventually became the American Stock Exchange (AMEX). Contrary to the 80-year old history, today the NYSE, AMEX, NASDAQ and hundreds of other exchange markets make a significant contribution to the national and global economy.

The growth in the number of market participants led the government to decide that more regulation of the stock market was needed to protect those investing in stock. History was made in 1934, when following the Great Crash, Congress passed the Securities and Exchange Act. This act formed the Securities and Exchange Commission (SEC), which, through the rules set out by the act and succeeding amendments, regulates American stock market trading with the help of the exchanges. It also includes overseeing the requirements for a company to issue stock shares to the public and ensures that the company offers relevant information to potential investors. The SEC also oversees the daily actions of market exchanges and how they trade the securities offered.

Although historically, investing in stocks was a “hobby” for the rich, an average person too soon came to realize the value of the investing in stocks vs. traditional assets like land or a house.

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Stock options

Explanation of stock options

What are stock options?

Stock options can be a very tricky subject for beginning investors. Options are a somewhat esoteric financial instrument, which offer certain characteristics that are similar to stocks, but with enough variance to require study.

An investor who buys an options contract has the right to purchase 100 shares of stock at a later date. This can be a big advantage to an investor in a rising market. Writing an options contract to purchase stocks later is called selling put options.

If the investor is confident that a stock will go down, he can sell 100 shares of the stock and then buy them back later at a lower price.

Many times investors will buy options contracts to hedge their current trade. If they aren't completely sure, they can take some downside risk away, by betting an amount of money on the opposite trade.

The most common use of options contracts is to hedge trades of the underlying stocks. If someone is long a stock, they will buy puts to ensure some sort of profit just in case the stock goes down. Investors can use the fact of the small premium of options contract to control a much larger block of underlying stock. Options, unlike stocks, can and will expire worthless on certain dates, so timing is more important that with other types of trades.

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Goldman Sacks (GS) could possibly head further north to the $140 area. I'll be waiting till it starts dipping and will Short until mid august. I'll start looking into what PUT options could be interesting.
Any Comments ? :P

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