Welcome to the Options Education World

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Welcome to The World of Options Trading
My blogs takes you to the options education world
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Implied Volatility and Bull Put Spreads
1. Implied Volatility and Bull Put
Spreads Selling bull put spreads during a period
of high implied volatility can be a wise
strategy, as options are more expensive and an
option trader will receive a higher premium than
if he or she sold the bull put spread during a
time of low or average implied volatility. 2.
Outlook and the VIX The VIX measures the implied
volatility of SP 500 index options and it
typically represents the markets expectation of
stock market volatility. Usually when the VIX
rises, so does the implied volatility of
options. 3. Selling the Spread If the VIX was
still at 12 percent like it had been previously,
the implied volatility of these options could be
lower and the trader might only be able to sell
the spread for 0.90 versus 1.00 when it was at
18. Final Thoughts When examining possible
option plays and implied volatility is at a level
higher than normal, traders may be drawn to
credit spreads like the bull put spread.
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A Butterfly Spread Used Directionally
For the most part, option traders use butterfly
spreads for a neutral outlook on the underlying.
The position is structured to profit from time
decay but with the added benefit of a margin of
error around the position depending on what
strike prices are chosen.
A Butterfly
The long butterfly spread involves selling two
options at one strike and the purchasing options
above and below equidistant from the sold
strikes. This is usually implemented with all
calls or all puts.
Directional Butterfly
To implement a directional butterfly, a trader
needs to include both price and time in his
outlook for the stock. 
Final Thoughts
One of the biggest advantages of a directional
butterfly spread is that it can be a relatively
low risk and high reward strategy depending on
how the spread is designed.
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Do You Understand Settlement?
Many option traders limit their universe of
option trading to two broad categories. One group
consists of individual equities and the similar
group of exchange traded funds (ETFs). The other
group is composed of a multitude of broad based
index products.
When this first group we are discussing settles,
it is by the act of buying or selling shares of
the underlying equity/ETF at the particular
strike price.
The second category, the broad based index
underlyings, are also termed cash settled index
options. This category would include a number of
indices, for example RUT and SPX.
One critically important fact with which the
trader needs to be familiar with is the unusual
method of determining the settlement price of
many of the underlyings it is NOT the same as
settlement described above.
When in doubt the best way to go is to ask your
broker how they will handle settlement for your
particular situation and and tell you what
alternatives you might have.
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Your Overall Option Delta
Delta is probably the first greek an option
trader learns and is focused on. In fact it can
be a critical starting point when learning to
trade options.
The delta of a single call can range anywhere
from 0 to 1.00 and the delta of a single put can
range from 0 to -1.00. Generally at-the-money
(ATM) options have a delta close to 0.50 for a
long call and -0.50 for a long put.
Taking the above paragraph into context, one may
be able to derive that the delta of an option
depends a great deal on the price of the stock
relative to the strike price of the option.
Calculating the position delta is critical for
understanding the potential risk/reward of a
traders position and also of his or her total
portfolio as well. If a traders portfolio delta
is large (positive or negative), then the overall
market performance will have a strong impact on
the traders profit or loss.
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Going for the Long Ball with OTM Call Options
It seems like almost every other week in my Group
Coaching class, a student will ask me about
buying deep out-of-the money (OTM) options. Many
option traders especially those that are new
initially buy deep out-of-the-money options
because they are cheap and can offer a huge
reward.
Negative Factors
Many factors work against the success of a deep
OTM call from profiting. The calls delta (rate
of change of an option relative to a change in
the underlying) will typically be so small that
even if the stock starts to rise, the calls
premium will not increase much.
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