Author Archive
Examples of the ‘Collar Strategy’ in Options Trading
Let’s take a look at how the strategy works with this position. For the sake of our illustration and to make our calculations easy let’s establish the collar using the December 27.5 put and the December 30 call, with both trading at $1.00.
Remember our stock price was $28.50. The cost of the collar will be […]
Properly Calculating Accurate Volatility Levels
Understanding and properly calculating accurate volatility levels is imperative for spread traders. In order to get accurate volatility levels, you must first determine a base volatility for the two options involved in the spread.
Getting a base volatility must be done because different volatilities in different months can not, and do not, get weighted evenly mathematically.
Since […]
Options Trading Mastery: Vertical Spread Recap
Vertical spreads can have various names. The same vertical spread could be called several different things by several different people. We have used two terms only: vertical call spread and vertical put spread. Each of these two spreads allows for two positions, long and short.
The long vertical call spread is constructed by buying one call […]
The Effects of Volatility on the Time Spread When Trading Options
When purchasing a time spread, the investor should pay attention not only to the movement of the stock price but especially to the movement of volatility.
Volatility plays a very large roll in the price of a time spread and, as we have stated, the time spread is an excellent way to take advantage of anticipated […]
Options Trading Lesson: Volatility
To get a firm grasp of volatility’s effect on vertical spreads, let us examine three spreads against different implied volatilities while keeping the stock price constant at 67.5. These are the 60 - 65, 65 - 70 and 70 - 75 call spreads.
In-the-Money Vertical Spreads
Looking at the in-the-money spread (June 60 - 65), we see […]
Options Buyer Risk & Reward
Like most trades, time spreads have a maximum loss for the buyer. As a buyer, you can only lose what you have spent. If you paid $1.00 for the spread then your maximum potential loss is that $1.00. If you bought the spread for $2.00, then $2.00 is the maximum potential loss.
The buyer of a […]
Options Trading Lesson: Closing the Time Spread Position
It is important to remember that the time spread will leave you with several potential positions that can be altered by other options or stock in numerous ways.
There are a number of decisions you must make to clarify your understanding and goals. Being open to a number decisions can be a very good […]
How to Calculate the Volatility of the Spread in Options Trading
To be able to calculate the volatility of the spread, we must equalize the volatilities of the individual options.
First, let’s move the June calls by moving June’s implied volatility down from 40 to 36, a decrease of four volatility ticks. Four volatility ticks multiplied by a vega of .05 per tick gives us a value […]
Options Seller Risk/Reward
The seller of a time spread buys the nearer month option and sells the outer-month option in a one to one ratio.
In order to profit from the sale of the time spread, the seller is looking basically for two things.
First is a decrease in implied volatility. As volatility decreases, the out-month option (which the seller […]
Options Trading Lesson: Spread Trading
In options trading, there are some basic lessons that are the backbone of many other successful options trading strategies. How to engage in spread trading in options trading to enhance potential gains is one of these lessons.
Spread trading is a foundational tool that you should have in your options trading toolkit. […]
