Options and Futures

Rory Gwozdz

Today’s Outline

• Futures Introduction• Basic Security Review• Derivatives + Volatility• Calls• Puts• The Greeks• Strategies + Selling• Questions + thinkorswim

Futures• Buying some thing in the future

Futures• VIX - Volatility

Futures• VIX - Volatility

Basic Security Review

• Buying a Stock• Shorting

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Derivatives + Volatility

• Underlying Security• Side• Strike Price• Time To Expiration• Interest Rate• Premium (shocks)• Volatility

Calls• “The option to purchase an underlying security at

a specified price by a given date.”• Essentially, a call is a contract that says you can

buy X security for Y price by* Z date. Bullish!

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M1 M5 M9 M12

Calls• As a buyer, you make money as the UL goes up.

It looks like this:

Puts• “The option to sell a security at a specified price

by a given date.”• Essentially, a put is a contract that says you can

sell X security for Y price by* Z date. Bearish!

10

5

15

10

M1 M5 M9 M12

Puts• As a buyer, you make money as the UL goes

down. It looks like this:

The Greeks• Delta – Sensitivity of an option’s price in relation to a

$1 change in the underlying security.• Gamma – Sensitivity of Delta to a $1 change in the

underlying price. • Vega – The theoretical increase in value of an option

due to a one percent increase in implied (historic) volatility. (Zeta is the same metric with theoretical implied volatility)

• Theta - rate of value loss in a given day, all else equal.• Rho - The measure of the expected change in an

option’s theoretical value for a 1 percent change in interest rates.

DELTA• Delta – Sensitivity of an option’s price in relation to

a $1 change in the underlying security.– % Chance in the money– Change in Option Value as UL goes up– Hedging Ratio

GAMMA• Gamma – Sensitivity of Delta to a $1 change in the

underlying price.

VEGA• Vega – The theoretical increase in value of an option

due to a one percent increase in implied (/historic) volatility.– Fun Fact about Vega

THETA• Theta - rate of value loss in a given day, all else

equal.

RHO• Rho - The measure of the expected change in an

option’s theoretical value for a 1 percent change in interest rates.– Not that important except for shorting stocks, or when

interest rates are markedly higher• Cost of carry• Cost to hedge

Strategies

• Debit Spreads• Credit Spreads• Theta Decay• Vega/Zeta Arbitrage • Vol Trading– Strangle (Special case = Straddle)– Edge Taking

• Binary Events

Questions?

Thinkorswim and volatility if time