hi)I am interested what the main reason for using some kind of indicators such as delta,beta and others trading options which are used to finding out the volatility.but as I understood volatility ratio enable us to know percent of fluctuations and I always believe that forecasting of trend has been enough to trade options successfully?
It is because options prices are affected by not only price direction, but also by interest rate level (not much impact), time decay (longer the period for the option, the more it costs and the opposite is true), and by volatity (big factor).
If the stock is volatile it increase the probability that the option would be in-the-money, therefore increase the value of the option.
The example of an application: For example, if you don’t have a specific believe about the direction of the stock, but you strongly believe that the volatility would increase (you expect news about a war or some external shocks, that are not priced yet into the options). You can impliment a option strategy call “staddle”: buy call and put options with the same exercise price, maturity and volume. If you are wrong, options would expired worthless and you loss premiums. If you are right, the options would gain in value. Even if the direction does not move too far, the volatility would push prices of both options up and you can sell them before expiration to earn profit.
thanks man)in addition,how to calculate greeks such as delta,volatility,gamma .Surfing a lot of web sites I have not found some positive information related to this topic.Only did I understand that you have to use Black Sholes equation in computing volatility,but how to calculate others greeks,for example Delta I dont understand?
This is much more extensive topic which is not covered for Level 1. I think in Level 2 the greeks formulars were presented, but might not be tested. There are all derived from Black-Scholes. In real life you don’t need to derive formulars, just need to understand them, how to use them + plug in the data. They will cover that on Level 2 so concetrate on passing the first one first.
But if you still want to calculate them:
I am curious ,how to calculate greeks and volatility using informatiom ,for instance,from yahoo finance which include information about underlying price,strike and date of expiration .Formulas which you have described above possibly couldnt be calculated using this informatin,What to do in this case?On a more practical level would I be able to hedge stocks and generate profit in terms of options using only information from Yahoo Finance?
Edit: completely missed that Unemployed covered this for you…
no offence but you want too much. CFAI spend a huge part of its curriculum to explain it on Level 2 and 3, and schools have courses to teach about derivates. If you want to know more I suggest to get some books. There is no way I can teach you the whole thing here.
Hi guys,again.Learning options on a more practical level,not only did I study all information available in the Internet,bul also I flicked through Options and Derivatives by John Hull and still don’t catch on some stuff
- Taking Call Long Option for example,how to calculate profit from trading.Whether we use the difference between strike price and current stock price times 100 provided that we have bought 1 contract (showing on this example http://www.call-options.com/options-trading.html).So if the call option costed about 3$ with Strike Price 40,breakeven point would be 43$ and then stock price would become 50 on condition that I bought one contract as well.So according to calculations described above on these web sites my profit would be (10*100 - 3*100)=700?? On the other hand on this web site http://www.investopedia.com/university/options/option2.asp the difference between current stock price and strike price supposed to be 8$ whereas on this site 8.25?? Consequently many questions have arised 1)Why to use the Black Sholes Formula in calculating real option price? 2)Why to use Greeks such As Delta ,Theta if they dont represent information about speed and probability whether stock price would be higher then Strike Price? 3)Looking at the option desk there are two option prices Bid and Ask.What price should we take into account when trading,for instance call option? 4)Practically,what gives you greeks?Delta shows how is changing option price relatively stock price in terms of 1 dollar per share?And what does it mean ?if option price calculating (Current Stock Price -Strike Price) according to both websites described above 5)How to take into account taxes,brokers’ commisions in trading options? 6)What is the differences between In the money,out of money and at the money? Ahh,writing this made me feel very exhausted)But I hope You will have answered my questions.Its very vital for me ) Thanks in advance Nick