What is a Stock?

● Represents a fractional ownership of a company

● A 2-dimensional asset whose value is shown as a line on a chart that goes up or down.

● Common misconception: Real investment occurs when handing money to a company

in order to make it more competitive i.e. during an IPO on the primary market, but this
isn’t what happens when you buy a stock from another investor on the secondary
market.

● All investors are indeed traders in disguise, since the main goal is to see the company’s
share price go up in the end, while desiring to buy low and sell high.

● Dividends are generally a “bribe” by the company to get investors to buy their stock and
serves as a hedge from a drop in share price at best.

What is an Option?

● An option is a contract in which one party (seller or option writer) sells risk for a price.

● It is a legally binding promise that can be bought or sold if a certain condition is met.

● Call option: A contract that allows the buyer the right (not the obligation) to purchase
100 units of the underlying security at a predetermined strike price & within a fixed
period of time (before expiration) from the seller. Buyer expects the share price to rise.

● Put option: A contract that allows the buyer the right (not the obligation) to sell 100 units
of the underlying security at a predetermined strike price & within a fixed period of time
(before expiration) from the seller. Buyer expects the share price to fall.

● Call option seller: Bets that the underlying security price ideally (i) doesn’t rise beyond
the strike price, (ii) stays the same or (iii) falls below by the option’s expiration date i.e.
(expires worthless). Gets paid a premium by the buyer for taking on that risk.

● Put option seller: Bets that the underlying security price ideally (i) doesn’t fall below the
strike price, (ii) stays the same or (iii) rises above by the option’s expiration date. Gets
paid a premium for taking on that risk.
● Option seller’s key objectives:

○ Figuring out how much the underlying security price can move within a fixed time
frame as determined by the option’s maturity period e.g. in a week, month or
year.

○ Charge as much as possible to the buyer for taking on that seemingly unlimited
risk of an adverse price move and the legal obligation to buy/sell the security at a
disadvantageous (favorable for buyer) price.

● Options trading is always about how fast the price will change, how far it will move, or
when it will move within a period of time.

● Options trading is about stacking the odds in your favor and knowing when to bet with
the house or against it.

● Options allow you to trade the:

○ Aggressivity of a price move.

○ Timing of a price move.

○ Actual distance of the price move.

○ Lack of aggressivity of a price move.

○ Lack of price movement over a given time frame.

○ Small range of the price movement.

● A stock trade always has a 50% chance of going up or down.

● The pricing in options reveals a plethora of information:

○ Options traders look at pricing models and volatility to determine odds for trading

○ In both higher and lower prices in the stock, each option will have its own
probability.

○ Probabilities are also calculated across different time frames.

Option Trader’s ToolBox

● P&L for actual Long stock position

○ Above chart can be replicated using options.

● P&L for Synthetic Long Option Position using ATM Call & Put Options

○ Closely mimics the profile of a long stock position of 100 shares.

○ It isn’t a true stock since it doesn’t pay out dividends and there is a time limit i.e.
the options expire eventually.
 ○ Helps you to reduce your initial cash outlay or even completely offset it provided
that the price of the sold ATM Put >= purchased ATM Call.

○ Generally is cheaper than buying the stock outright and provides the same
exposure.

○ Since the P&L curve has the same slope as owning 100 shares of the underlying
stock, the potential losses will be as sharp as the gains.

● Relationship between stock & synthetic equivalent:

○ Owning stock (S+) = buying a call (C+) + selling a put (P-)

○ S+ = C+ + P-

● Covered Call

○ You own the stock and you sell one call for every 100 shares you hold.

○ Advantageous since if you lose the bet and the stock price soars, you simply just
need to provide the stock you already own to cover the loss.

○ Covered call = S+ + C-
 ○ The above depicts selling one ATM call option with 39 days till expiration &
owning 100 shares at the same time.

○ Premium received from selling the Call option effectively lowers the average cost
or breakeven of your initial long stock position.

● Naked Put

○ Involves selling a Put option for 100 shares of the stock without owning the stock
beforehand.
 ○ Has similar P&L profile as Covered Call as shown below with one chart
superimposed on the other:

○ Gains, losses and breakevens are almost the same for both strategies.

● Factors to consider between 2 such similar strategies: Covered Call & Naked Put

○ Price of Call sold for Covered Call vs Price of Put sold for Naked Put, whichever
price is higher makes its corresponding strategy more attractive.

○ Margin considerations e.g. Owning a stock and selling calls will cost you more
than just selling puts
 ● Table of Basic Option positional Relationships

How a Stock Trader looks at Stock Price

● Price is all the information about a company, expressed as a number.

● EMH states that everytime a new piece of information regarding a company

becomes available, the stock price quickly moves to reflect it.

● To trade price is to trade on information, so the only 2 edges for one to be profitable on
average is:

○ Be lucky

○ Have a piece of actionable information on the company that nobody else has i.e.
exploiting an inefficiency in information not yet priced into the stock.

● One way to express information is by using charts to visualize price in a particular

context.

● Charts are simply a way to incorporate & display all information, not a way to display
new information i.e. no predictive value.
How Option Traders Look at Stock Price

● Option traders see probabilities associated with the historical consensus of values
reflected in price.

● 2 characteristics of Stock price:

○ There’s a 50% chance that it will either go up or down.

○ For every dollar the price goes up, the owner of the stock earns a dollar in value.

● Option Price = “What we know” (current stock price, strike price, expiration date,
dividends etc..) + “What we don’t know” (Volatility or uncertainty of future share price
movements)

● Implied Volatility: The “idea” of what will happen to the underlying share price in the
future, that’s priced into options.

● Implied volatility of an at-the-money call is used as a basis for calculating

probabilities in most applications.

● Buyers and Sellers of options disagree about probability surrounding the future share
price, that’s why both are willing to enter into a trade.

● There are 2 ways to read probabilities: Mathematical probabilities & Trader’s

probabilities.

Mathematical Probabilities

● Probabilities of future price actions are derived from the prices of the options.

● NOTE:

○ Option prices are not based on probabilities !

○ Instead, probabilities are computed from the option prices that are set by the
market.
● IV(Implied Volatility) is derived from the option price & indicates the probability of a one-
and two-standard deviation move based on a normal distribution i.e. a bell curve.

● Under a normal probability distribution, the odds are equal in both directions.

○ There’s a 68.2% chance that the data will fall within +/- 1 Standard deviation
from the mean or 34.1% chance that the data is one SD from the right or left of
the mean.

○ There’s a 95.4% chance that the data will fall within +/- 2 Standard deviations
from the mean or 47.7% chance that the data is one SD from the right or left of
the mean.

● Implied Vol is by default expressed as an annual or annualized % figure and generally

represents the one-SD stock price movement over a period of 1 year.

○ If IV is 11%, this gives a probability of 68.5% for the stock move being +/-11%
over the next 1-year.

● To compute the IV for a smaller time frame, simply divide the annual IV % by the square
root of the number of days in a year:

○ Since there’s about 256 days in a year, divide IV by the √ ❑ to get a single day,
1-SD move for the stock.
Traders’ Probabilities

● At-The-Money Options have the same odds as a stock, 50% chance of going up or
down.

● Odds for ATM options are indicated by the Greek Indicator, Delta.

● An ATM call has a delta of approx. 50, which means when the underlying stock price
moves up by $1, the option price moves up by $0.50.

● Coincidentally, a delta of 50 reflects the 50% probability of the stock going up instead of
down, which is why delta is used as a test of probability.

● In math probability, a bell curve indicates the probabilities of an up or down move as

equally probable, so a 10% move has the same chance of happening regardless if the
price falls or rises.

● However, reality differs in such a way that a sharp upside move happens less frequently
compared to a sharp downside move (greater likelihood of occurring) i.e. “prices go up
like an escalator and down like an elevator”.

● Since traders are always cautious about quick drops in price:

○ They tend to pay more for puts to act as a hedge,

○ That willingness to pay a higher price translates into a higher delta.

● NOTE: All statistics regarding the probability are odds of where the share price will be by
expiration, not before.

● SPX at 1466, with ATM 1-Yr IV of 11% or 42-Day IV of 1.69%

● Option above chain shows 2 forms of math probabilities:

(i) Based on bell curve IV probabilities, there’s a 68% chance that the SPX will close
between 1425 and 1500 (+/- 1 SD) by expiration.

(ii) Probability that particular price will be in-the-money (ITM)

● Since there’s a 34% chance of price staying within one SD, there would be a 16%
chance (50%-34%) that price would move further than 1 SD and start to make money
i.e. be ITM.

● 1525 strike price sits outside the 1 SD move and there’s a 35% chance that the price
stays between 1466 and 1525.

○ Hence, there’s only a 15% chance (50%-35%) of making money.

○ However, this also means that there’s a 85% (50% chance of price going down +
35% chance of price will stay below 1525) that price doesn’t close over 1525 by
expiration.

○ At 1525, option delta is 16 which is reasonably close to the Prob of ITM at 15%.
 ● On the Put side at 1400 strike price, the Prob of ITM is 10% but delta is -14.1 or 14%.

○ Delta is higher on corresponding put since traders are pricing a higher likelihood
of 1400 than the math predicts.

○ In reality, an abrupt surprise down move is more likely to occur than an abrupt
surprise up move in price.

● Even if a price has a small probability of occurring on expiration day, it doesn’t mean that
the move can’t happen before expiration and then pull back.

● Monte Carlo Simulation:

○ Prob. of Strike price being touched before expiration (Prob. of Tch) for 1525 Call
is 25% vs the 16 Delta and 15% chance from normal dist at expiration.

○ Prob. of Tch before expiration for 1400 Put is 16% vs 14 Delta and 10% normal
dist probability at expiration.

● Another way to gauge the potential price movement by expiration is to look at the
option price itself.

● Using the 1475 strike level as the ATM price from the options chain table:

○ Price of ATM Call at $19, hence the seller doesn’t believe the underlying stock
will expire higher than 19 points at 1494 (1475 + 19).

○ When you buy that call, you have to be more right than the seller and the odds
that SPX expires higher than 19 points is against you.

○ By adding the ATM 1475 Call price + ATM 1475 Put price together to create a
straddle position, you get the length of a one-SD move in either direction i.e.
$18.9 + $30.1 = $49

Stock Price vs Option Price

● Stock prices communicate information regarding the value of the company.

 ● Stock prices don’t communicate statistical information.

● Stock price action is all historical.

● Option prices and the statistical information derived from them (e.g. IV, probabilities) are
forward looking.

● Information in an option’s price is the best forward indicator that exists.

● With the option pricing you are getting the absolute best research in the world for
free along with the collective wisdom of the market.

● Insiders, hedge funds, supercomputers, and geniuses set option prices just like they set
stock prices.

● The difference is that option prices communicate substantive information regarding

probable price moves within a given time frame.

● But this doesn’t mean that the information is accurate by expiration. Nothing predicts
the future!

Stock Prices and Delta

● Stock positions have a delta of 100 i.e. for every dollar the stock moves up or down, the
money made or lost moves in tandem.

● Hence, an options trader needs to find a trade with a delta of 100 to fully mirror the stock
price.

● Synthetic Stock Position: An ATM Call has a delta of 50 while an ATM Put has a delta
of -50, thus buying an ATM Call (50 Delta) & selling an ATM Put (-1 * -50 Delta) gives
you a delta of 100 (50+50).

● An alternative is to buy a deep ITM option with 100 Delta, which in a trader’s perspective
means that there’s a 100% chance that this option:

(i) Will be ITM or worth something by expiration

(ii) provides a dollar for dollar return on the option as the stock price rises.
● IBM stock last closed at $210.59 and options chain shown with 196 (almost 7
months) till expiry:

○ Price of the deep ITM 160 Call is at $51.20, while IBM last traded at $210.59.

○ Adding up the Price of ITM 160 Call & Strike level 160, you get a total value of
$211.20 ($160+$51.20), which is only $0.61 higher than the current price of the
stock.

○ You’re basically paying $51.20 for an option that provides a dollar-for-dollar

exposure vs buying the stock outright at $210.59 i.e. a fraction of the cost.

○ Should IBM make a 10% move or +$20 at any time up to expiration in 7 months,
the option will also gain $20 in intrinsic value i.e. a whopping 40% return.
 ○ Furthermore, the option’s delta shrinks to 50 as the closer price gets to the ATM
strike 160 level i.e. it loses value at a decelerating or slower pace as the stock
price drops!

○ If the stock were to drop 50% in value, to $100, you couldn’t lose more than you
paid for the option, which was only $51 whereas the stock owner wouldn’t be so
lucky.

How to view an Option’s Price

● Options are first and foremost a hedge on a stock trade.

● Option Price or Premium = Intrinsic Value + Time premium/value

● Intrinsic Value = The in-the-money portion of an option's premium i.e.

 ○ Call option: Stock price - Strike Price

○ Put option: Strike Price - Stock Price

● Time premium/value is the amount of the option's price that exceeds its intrinsic
value.

○ As an option nears expiration and time decreases, the marketplace is

increasingly less willing to pay any premium over intrinsic value until an
option is trading purely for intrinsic value at expiration.

● A relatively inexpensive put that makes money in a down move hedges a loss in the
stock.

● A put is a better hedge than a stop or market order to close a stock position since it is
able to profit even when the stock gaps down significantly which can render stop loss
orders useless.

● For an options trader, it is the price of options at various strikes that’s important,
not the level of the stock price.

● Implied Volatility is the indefinable piece that prices the option.

● There are 3 option pricing factors to consider: Actual price, Relative price and Future
price

● Actual Price: The Greeks

 ○ Delta - Change in value in an option price when the stock price moves by $1.

○ Gamma - Derivative of Delta and measures the rate of change in delta

(accelerating, decelerating or constant) when the stock price moves by $1.

○ Theta - Measures the effect of Time decay on the option position.

● Each option has its own unique ATM Implied Vol at every strike and across all
maturities, since each one has its own buy and sell market.

● This contrasts against math probability derived from the bell curve distribution, implying
a constant ATM implied volatility throughout all strike prices within the same period.

● Therefore, the actual price of an option as illustrated by its implied volatility may not
necessarily be based on a statistical basis (normal distribution).

● Relative Price: Horizontal, Vertical volatility skews & Volatility smiles

○ Vertical Skew: Examines the differences of IV of options of different strikes in
the same time period.

○ Horizontal Skew: Examines the differences of IV of options of the same strike

price over different time periods.

○ Skews are based on pricing that communicates opinions from the market.

○ Skews drive option strategies such as calendars and diagonals.

○ MIV = Mid-price ATM implied volatility

○ IV keeps rising as you follow the Put strikes down.

○ Puts have higher IVs than Calls since:

■ The Seller sells a greater perceived risk since Puts act as insurance for
the buyer.

■ Odds of a surprise move to the downside are almost always greater than
the odds of a surprise move to the upside.

○ You also see a skew with option pricing since:

■ If you are a buyer of options, you will pay relatively more for puts than for
calls.

■ If you are a seller, you get paid more for the puts than for the calls.
○ Chart in Figure 2.8 shows that implied volatility is considerably greater in
November than it is in January or April.

○ The reason for this is that November is when earnings announcements occur,
and the uncertainty associated with earnings is reflected in higher volatility.

○ Even if you didn’t know about earnings, you would still be compelled to find out if
there was any pending information regarding the company.

○ If you could not find any pending information, there is likely something about to
happen. Pricing information communicates an upcoming “event.”
 ○ Volatility smile occurs when vol skews up on both sides as strike levels go up
and when they go down.

○ Figure 2.10 shows a graph of April 2011 options for Yahoo, with 73 days to
expiration, that were affected by takeover rumors.

○ Since the risks of a large move up were present, traders aggressively bought
out-of-the-money calls and puts, driving up the price of those options and their
implied volatility by extension.

○ This scenario might lead to the use of strategies such as long straddles, short
ratio spreads, or short iron condors or strangles

● Future Price:

○ Although there isn’t any better indicator for future price action than the price of
an option, it doesn’t mean that it has 100% accuracy.

○ Traders need to assess how accurate an indicator has been historically.

○ The key to any successful trade is to not overpay or undersell for a security.

■ You can get the direction right but because you overpaid for that option, it
can still turn out as a loser.

○ No rational buyer would buy a stock if he thought the price were going lower, and
no rational seller would sell a stock below the best price possible. This
disagreement is what makes a market.
 ○ Think of option pricing in terms of standard deviation: The buyer and seller
disagree about the degree of price variation.

■ Let’s say a $10 move is one standard deviation and the cost of the option
is $10.

■ The seller would then expect the move to be less than one standard
deviation

■ While the buyer expects the move will be greater than one standard
deviation.

○ For an options trader, the stock price affects the option price through its
movement, but uncertainty & time decay affects the option price even if the stock
doesn’t move at all.

● Only option prices matter to an options trader!

How Time Decay & Volatility affect Option Price

● Option prices can change even when there’s no movement in the underlying stock.

● Assume stock price remains constant.

● Time decay is the most significant factor in option pricing.

● Time premium is the amount of the option's price that exceeds its intrinsic value.

● As an option nears expiration and time decreases, the marketplace is

increasingly less willing to pay any premium over intrinsic value until an option is
trading purely for intrinsic value at expiration.

● Time premium erosion works in favor of short-term option sellers.

● Conversely, the option buyer must overcome the erosion of time premium to
profit from a long option position.

● Implied Vol can significantly affect the time value portion of an option's premium.
● Volatility is a measure of risk (uncertainty), or variability of price of an option's
underlying security.

● Higher volatility estimates indicate greater expected fluctuations (in either

direction) in underlying price levels.

● This expectation generally results in higher option premiums for puts and calls
alike.

○ It is most noticeable with at-the-money options.

● The greater the volatility, the higher the option prices and vice-versa.

● Rate of time decay for ATM options is steady and falls quickly toward expiration:
● Rate of TIme decay for OTM options is relatively quickly throughout the option’s
life:

● Say there’s a bullish view on a stock by momentum & contrarian traders.

● Contrarian traders would wait for the stock to bottom out and then enter a bullish trade,
thereby entering at a time of relatively heightened volatility.

○ Buying a call might be expensive due to high vol and prevent the trader from
making money if the stock doesn’t move enough.

○ So a better strategy might be to sell a relatively inexpensive put that will lose
value as the stock price rises and vol drops.

● Momentum traders would seek to buy the stock at all-time highs with the expectation for
the stock to drift higher, thereby entering at a time of low volatility.

○ Selling a put may not be as beneficial since vol may not drop enough to be
advantageous for them.
 ○ Might be advantageous for the trader to buy a relatively inexpensive call option.

● The put seller always faces a double risk: (i) The price might move against the trade,
(ii) volatility might increase the value of the options more dramatically.

● Option prices can fluctuate independent of any underlying price action.

○ As earnings approach, stock prices will frequently not move, waiting for the
release of earnings.

○ The uncertainty associated with earnings usually drives volatility up and,

consequently, the option prices.

Volatility of Volatility

● Bollinger bands measure the vol of stock price, typically using a 20-day MA with lines
drawn on either side showing a 2-standard dev move from the average.

● Can use Boll Bands on a volatility chart to gauge the volatility of volatility.

● Key Principle of Vol: Implied Vol of an asset tends to revert to its mean.

● If the implied volatility jumps too high or falls too low, it will adjust back.

● Many stock traders use reversion to the mean to trade stock.

● However, volatility has a tendency to revert to the mean more consistently and more
quickly than do stock prices.

● The VIX is a popular measure of vol for the S&P 500 and is computed using an algo by
averaging out the prices of options for the Index for the next 30 days.
 ● When the VIX breaks the upper Bollinger Band, it usually drops right back to the mean.

● Volatility provides a trading opportunity aside from direction in the market.

Executing multiple trades

● A guiding principle for options traders is to execute more than one trade at a time.

● If you buy calls when you think the market will go up and buy puts when you think the
market will go down, you trade options, but you are not thinking like an options trader.

● Most strategies benefit from selling during high-volatility conditions and vice versa for
buying strategies.

● Stock traders do only one trade at a time because they trade stock prices.

● Options traders trade option prices, which are affected not just by price movement but
also by the movement of volatility.

● When trading option prices you are, by definition, trading volatility.

The Right Price for Volatility

● One way to determine whether you’re overpaying or underselling an option would be to

look at Vol skews:

○ The vertical skew looks at relative implied volatility across different strikes in the
same time period,

○ The horizontal skew looks at relative IV across different time periods for the
same strike prices.

● Another way to determine the price of volatility is through the use of historical volatility
charts.

● Implied volatility is a type of market prediction of future price movement.

● Over time, stock price action reveals actual volatility.

● Important to know how accurate the predictions of volatility expressed by implied

volatility were by comparing it against the actual volatility that occurred i.e. did IV
get it right or not?

● Russell 200 Index Rolling 30-Day Volatility Chart:

● The consistent upper line represents implied volatility, and the lower line is the historic or
statistical volatility that occurred.

● The larger the gap between the two lines, the larger the “miss' in option prices i.e. the
option prices typically predict (overestimates) a larger move than what actually occurs

● The difference between historical and implied volatility was consistently true over several
time frames.

● If implied volatility was higher than statistical volatility, then selling had an edge.

● In times when statistical volatility was higher than implied volatility, buying had an edge
because reality was more volatile than was accounted for in the option prices.

● When both implied and historical volatility were the same, neither buyer or seller had an
edge.

● Although these charts are not useful for predicting volatility accurately, they are tools to
evaluate the likely success of a particular sell or buy option strategy.
 ● The direction of the volatility chart is usually inversely related to the direction of the
underlying market, so rising volatility indicates a falling market and vice versa.

● Flat volatility does not mean flat action in the underlying stock.

● Volatility can remain flat, and the stock can keep rising as no further fear is priced into
the options.

When to Buy or Sell Options

● Buying an option can be compared to standing in quicksand. The longer you stand in
one place, the harder it is to get out.

● The buyer wants to extricate herself as quickly as possible from the quicksand, and the
seller wants the buyer to sink to the bottom.
● Therefore, before placing any trade, all issues of volatility should simultaneously be
viewed with one eye on the calendar.

● Options buyers look for low relative volatility and, if possible, a higher historic volatility to
implied volatility to have as many factors as possible in their favor in the race against
time.

● Sellers of volatility want to sell high relative volatility, want to see a large gap between
implied volatility and historical volatility, and want nothing to happen.

● A covered call is a strategy involving a long stock and a short call. Even though some
might place such a trade to collect some premium as a hedge against a small bearish
move, it is a bullish directional trade.

● Selling a naked put has the same risk profile as a covered call so which would be a more
appropriate strategy?

● A selling strategy favors higher relative volatility and higher implied volatility than
historical volatility.

● If you are a contrarian, selling naked puts is your best strategy. You wait for big moves in
volatility and sell puts with big premiums.

● If you are a momentum trader, it might be a bit more difficult to find a good covered call
strategy in terms of premium received, but you are more confident that time and
direction will rule the day.

● A put seller with high volatility is doing three trades at the same time, the trader either
wants:

○ Volatility to drop

○ The stock to do nothing

○ The stock to move up

● The covered call seller is only doing two trades at the same time, this trader wants:
 ○ The stock to go up

○ The stock to do nothing.

● NOTE: This covered call is not a better or worse trade than the sale of naked puts. It’s
just different. Price guides the strategy. Situations guide the price.

● When you buy and sell options, you are trading option prices, not stock prices.

● Knowing what information price communicates, its context, and exploiting any
inefficiency are keys to successfully trading and to thinking like an options trader.

Pure Options Trading

● Options available for any underlying stock in the same month and different months
permit you to create complex strategies to lessen risk exposure or to enhance gains.

● Buyers need something to happen in order to make money. When they win they can win
very big.

● Selling is about getting paid for taking that risk. You can’t win big selling because your
gains are limited to the credit you get for selling the option.

● Both good buy & sell strategists fully understand all the dynamics of price, the skews in
volatility and historical behavior of volatility, and the effect of theta and gamma.

● A smart buyer who knows how to navigate through the dangers of time decay can do
very well.

● A smart seller who tries to make small profits consistently and limit his exposure to risk
can also be successful.

● Regardless of whether you are a buyer or a seller, you should pursue any trade only in
the right set of circumstances and opportunities.

● Options trades evolve. The passage of time can hurt or help a trade, depending on how
it is structured.

● A losing trade today can be a winning trade at expiration, with the stock at the exact
same spot. The reverse is also true.
 ● Therefore, options traders have to be time travelers in a sense. You have to look at a
trade through multiple future time frames and constantly ask yourself whether staying in
the trade is worthwhile.

● The evolving nature of options trades means you don’t have to wait until expiration to
close a trade. In most cases you shouldn’t.

Basic Greek Concepts

● Delta is actually a measure of how much the option will gain or lose in value relative to a
$1 move in the stock.

○ So, a delta of 50 means that the option will gain a value of 50 cents for a $1
move up in the stock.

● Gamma measures how fast Delta changes relative to a $1 move in the price in the stock.

○ Gamma’s a derivative of Delta

● In relation to implied volatility, Vega, measures how much an option will gain relative to a
1% increase in volatility.

● Vega (or volatility) has the greatest impact on price the further an option is from
expiration.

● That impact is eventually overwhelmed by theta (or time decay).

 ● An option $10 in the money has a much greater chance of retaining its full value the day
of expiration than it does 100 days from expiration.

● Delta reaches 100 much faster as time diminishes in the trade.

● An options buyer will gain or lose money faster through the ebb and flow of volatility in
far out-of-the-money options than when buying close to expiration.

● When trading options, you need to trade more than one element at a time. Attention
should be focused on the strategy plus the accompanying greeks.

Basic Directional Trade: Buy Call