Optin Box close
Welcome to the Options University Blog

This is no ordinary ebook. Options 101 just hit the bookstore shelves all over the country. It's available at Amazon.com and BarnesandNoble.com and we've been told it's the 'best options book on the market today'.

Because we feel that a proper foundation in options is critical to your success,
We'd Like To Offer You
3 FREE Chapters
of Our NEW Book
Options 101:
From Theory to Application
by Options Expert Bill Johnson
To get your 3 FREE chapters, simply enter your name and email address below, and we'll send these to you right away
(You'll have them in your email inbox instantly!).
"It's fun for me to spend time with people that are really bright and passionate about something that I love as well. Options University has done a wonderful job of getting their message across in an easy to understand way. I hope this is the first of many..."

Tom Sosnoff
thinkorswim, inc.
Name:
E-mail Address:

Aug

6

Greek Sensitivities and Going Naked - Options Mastery Series Lesson 23

Filed Under Options Mastery Series 

Greek Sensitivities and Going Naked
 
In ancient times, Greek Oracles played an important part in trying to foresee the future. Appropriately, the Greeks produced by the Option Pricing Model do much the same. Let’s take a look at how the Greeks function within the context of a call.
 
First of all, when you buy a call, you become long Deltas. If you sell a call, you become short Deltas. Gamma will also be long when buying a call and negative if sold. With Gamma comes short Theta because from the moment you buy the call, the extrinsic value is decaying. More specifically, the call will lose value due to negative Theta. Finally, Vega, like Delta and Gamma, is long when a call is purchased.
 
When an option trader acquires a call, they acquire sensitivity to movements in volatility. When volatility goes up, the price of the option will also increase. The reverse also holds true; if volatility decreases, that will negatively impact the option price.
 
In summary, for a long call, you will be long Delta, long Gamma, long Vega and short Theta.
 
If an option trader sells a call, they’re going to acquire short or negative Deltas. As a generalization, when a trader sells a call, they’re going to acquire negative Delta; the actual amount of negative Deltas will depend on the Delta of the stock option you’re selling. Gamma will also be negative when a trader is selling options. However, because a trader is short the call, negative Theta will yield a net positive Theta. In other words, the trader will be collecting the amount of extrinsic value that would normally be decaying over the life of the contract time. Remember, when selling a call, the trader keeps the premium when the option expires provided it hasn’t moved into-the-money. In affect, the trader are accrues the value of the premium each day. Finally, a trader will be short Vega when selling a call. If Vega is decreasing when in a short position, that is a good thing because there is less of a chance of the option moving into-the-money.
 
Professional traders such as Options University’s Ron Ianieri feel that it’s important to be aware of the quantity of each Greek in your long or short calls. This can become particularly important when hedging becomes a factor.
 
Going Naked
 
Speaking of hedging, what happens when an option trader trades naked calls? When talking of a naked option we refer to an unhedged position. To get a better understanding, let’s look at the risk-reward profile of being “naked”.
 
If a trader buys a naked call, they have a maximum potential loss of the premium if the stock goes down and an unlimited potential profit if the stock goes up. Some say that you actually are hedged in the sense that the loss is limited to the premium amount.
 
But what happens when you sell a naked call? A completely different profile emerges. When a trader sells a call, the maximum profit is the premium received for selling the call. But what happens if the stock zooms up? The potential loss is unlimited.
 
Considering that the markets have a positive bias, this strategy of selling naked calls can be precarious. That is why almost all knowledgeable options traders strongly believe that selling naked calls is not a wise strategy. Any strategy that exposes a trader to an unlimited loss shouldn’t be traded. That doesn’t mean that selling a call is bad, it just means that some sort of hedging is needed to reduce the upside risk.
 

For more information on all aspects of stock options, go to www.optionsuniversity.com for a listing of online classes, webinars and mentoring programs.

Share This

Comments

Leave a Reply

You must be logged in to post a comment.

Close
E-mail It