Best Option Analyzer/Software

riskarb · May 6, 2006

Quote from WmWaster:

- As the underlying price rises, the option premium will rise faster due to the increase in intrinsic value. But it drops, the option premium will fall slower due to the decrease in intrinsic value

As momo has stated, it doesn't work that way. OTM options, for example, don't have intrinsic value -- the increase is derived from delta, the rate from gamma and the change in vol priced in vega[rate of vega, dvega/dvol]. Deltas cannot exceed 100, so the option will not "rise faster" than the underlying unless there is a dramatic increase in implied volatility. The PnL cuve on the option may indeed exhibit dramatic leveraged gains, but a $1.00 gain in spot will not equate to a $1.00 gain in the option; two exceptions, a deep itm option at 100d, and a sharp rise in option vol... one further exception w.r.t. rho, but it's too insignificant to include here.

Ppl who are new to the game should limit options trading to stock proxy -- only trade deep itm options [long] as a surrogate for the underlying shares. Deep itm options carry insignificant greek-risk beyond delta, which is easy to understand with no risk of assignment.

WmWaster · May 6, 2006

Quote from riskarb:

As momo has stated, it doesn't work that way. OTM options, for example, don't have intrinsic value -- the increase is derived from delta, the rate from gamma and the change in vol priced in vega[rate of vega, dvega/dvol]. Deltas cannot exceed 100, so the option will not "rise faster" than the underlying unless there is a dramatic increase in implied volatility. The PnL cuve on the option may indeed exhibit dramatic leveraged gains, but a $1.00 gain in spot will not equate to a $1.00 gain in the option; two exceptions, a deep itm option at 100d, and a sharp rise in option vol... one further exception w.r.t. rho, but it's too insignificant to include here.

I'm not sure if I'm correct. I just listen from others.

Although OTM options has no intrinsic value, an OTM option will eventually have intrinsic value when the underlying moves in your favour, so the above statement still holds true.

Ppl who are new to the game should limit options trading to stock proxy -- only trade deep itm options [long] as a surrogate for the underlying shares. Deep itm options carry insignificant greek-risk beyond delta, which is easy to understand with no risk of assignment.

But deep ITM options have lower volume and higher premium.

Anyway I don't think higher premium matter, but I could be wrong.
My understanding is as long as "favourable change in the underlying * delta > spread cost", I should gain if I simply close out my option. Right?

Why just long? Why no short?

I wonder if it differs for index or commodity options.

MTE · May 6, 2006

Quote from WmWaster:

I'm not sure if I'm correct. I just listen from others.

Although OTM options has no intrinsic value, an OTM option will eventually have intrinsic value when the underlying moves in your favour, so the above statement still holds true.

But deep ITM options have lower volume and higher premium.

Anyway I don't think higher premium matter, but I could be wrong.
My understanding is as long as "favourable change in the underlying * delta > spread cost", I should gain if I simply close out my option. Right?

Why just long? Why no short?

I wonder if it differs for index or commodity options.

WmWaster,

As I have stated on another thread, you ask questions, but you don't understand the answers so you keep asking questions yet no matter how many questions you ask you still don't understand the answers.

Learn the basics first, then ask questions.

WmWaster · May 6, 2006

MTE, you may be right.

My knowledge of options is nothing about very basic. And I know nothing about application. I'm just learning theories.

I do know what's call/put and different trading strategies (eg long straddle). If I see the trend is in upward / downward / sideway, I know how to select the right strategy.

But I don't really know anything about:
- how to evalute different options (eg If I wish to long call, which option is the best to go, according to real market situations? [I know something about OTM, ATM, ITM, but I need some practical advice])
- how I should deal with volatility, vega, gamma etc. in real trade (I know what they are and simple relationships between them and the price)
- and so on

Do you know if there's any good books or online resources which focus on the application of option trading (No theory!)?
I particularly hope the author doesn't just restate every piece of knowledge in option, but tell me about his insights of option trading (like how Warren Buffet teaches beginners about long-term investment).
I would also like to read how the author apply their knowledge into profits. This should answer most of my questions.

steve46 · May 6, 2006

"Options as a Strategic Investment" by Lawrence McMillan

This is in my opinion, the best (and most understandable) combination of theory and practice for the beginner.

Steve

MTE · May 7, 2006

Quote from WmWaster:

MTE, you may be right.

My knowledge of options is nothing about very basic. And I know nothing about application. I'm just learning theories.

I do know what's call/put and different trading strategies (eg long straddle). If I see the trend is in upward / downward / sideway, I know how to select the right strategy.

But I don't really know anything about:
- how to evalute different options (eg If I wish to long call, which option is the best to go, according to real market situations? [I know something about OTM, ATM, ITM, but I need some practical advice])
- how I should deal with volatility, vega, gamma etc. in real trade (I know what they are and simple relationships between them and the price)
- and so on

Do you know if there's any good books or online resources which focus on the application of option trading (No theory!)?
I particularly hope the author doesn't just restate every piece of knowledge in option, but tell me about his insights of option trading (like how Warren Buffet teaches beginners about long-term investment).
I would also like to read how the author apply their knowledge into profits. This should answer most of my questions.

Well, I'm sorry to tell you this, but you need to learn the theory behind options before you can learn about option trading. That is, you need to understand how options are priced, why volatility is important, what are "Greeks" and how they are used, and so on. You cannot trade options without knowing these things.

Here's a list of some books on options with reviews: Elite Trader Books Section.

Some of the better books on options:
"The Option Trader Handbook" By Jabbour and Budwick
"Options Trading: The Hidden Reality" by Cottle
"Option Market Making" by Baird
"Option Volatility and Pricing" by Natenberg

WmWaster · May 7, 2006

Quote from MTE:
Well, I'm sorry to tell you this, but you need to learn the theory behind options before you can learn about option trading. That is, you need to understand how options are priced, why volatility is important, what are "Greeks" and how they are used, and so on. You cannot trade options without knowing these things.

I do understand how "Greeks" affect the option price. Eg: I know how the option price be affected if implied volatility / delta / gamma / vega changes. I know their relationships as stated previously. There're a lot of complex Math and formulas for option pricing too.

However I don't see how I can apply such knowledge into practical use, how they really operate and affect trading decisions. I feel I'm sort of in the ivory tower if I keep reading these books. That's why I prefer more on practicality. No more theories as I have too much.

Here's a list of some books on options with reviews: Elite Trader Books Section.

Some of the better books on options:
"The Option Trader Handbook" By Jabbour and Budwick
"Options Trading: The Hidden Reality" by Cottle
"Option Market Making" by Baird
"Option Volatility and Pricing" by Natenberg

Thanks.
I'll take a look.

MTE · May 7, 2006

Quote from WmWaster:

I do understand how "Greeks" affect the option price. Eg: I know how the option price be affected if implied volatility / delta / gamma / vega changes. I know their relationships as stated previously. There're a lot of complex Math and formulas for option pricing too.

However I don't see how I can apply such knowledge into practical use, how they really operate and affect trading decisions. I feel I'm sort of in the ivory tower if I keep reading these books. That's why I prefer more on practicality. No more theories as I have too much.

Thanks.
I'll take a look.

Actually, you do NOT understand the Greeks. The Greeks do NOT affect the option price.

Well, the reason you don't see how you can apply such knowledge is because you don't have the knowledge. It is fair to say that the Greeks may not be all that useful to a retail trader who concentrates on individual positions, however, you must still thoroughly understand them.

Anyway, I feel like I keep saying the same thing over and over again yet nobody is listening so I'm gonna stop here and not post anymore. Do whatever you feel is best for you.

WmWaster · May 7, 2006

Quote from MTE:

Actually, you do NOT understand the Greeks. The Greeks do NOT affect the option price.

Well, the reason you don't see how you can apply such knowledge is because you don't have the knowledge. It is fair to say that the Greeks may not be all that useful to a retail trader who concentrates on individual positions, however, you must still thoroughly understand them.

Anyway, I feel like I keep saying the same thing over and over again yet nobody is listening so I'm gonna stop here and not post anymore. Do whatever you feel is best for you.

I'm not sure if it's my misunderstanding or just our wording is different.

Like delta is the measurement of the sensitiveness between underlying and option premium.
A delta of +0.7 means that for every $1 the underlying increases the call option will increase by $0.70.
So an increase in delta does affect the option premium.

One greek has indirect relationships with option premium, ie Gamma.

But you may say, since they are mesurements only, they are NOT the real factors behind which affect the option premium.

That's my understanding.

Anyway, to keep the discussion short, simply tell me a short answer - right or wrong.

IV_Trader · May 7, 2006

Quote from riskarb:

As momo has stated, it doesn't work that way. OTM options, for example, don't have intrinsic value -- the increase is derived from delta, the rate from gamma and the change in vol priced in vega[rate of vega, dvega/dvol]. Deltas cannot exceed 100, so the option will not "rise faster" than the underlying unless there is a dramatic increase in implied volatility. The PnL cuve on the option may indeed exhibit dramatic leveraged gains, but a $1.00 gain in spot will not equate to a $1.00 gain in the option; two exceptions, a deep itm option at 100d, and a sharp rise in option vol... one further exception w.r.t. rho, but it's too insignificant to include here.

Ppl who are new to the game should limit options trading to stock proxy -- only trade deep itm options [long] as a surrogate for the underlying shares. Deep itm options carry insignificant greek-risk beyond delta, which is easy to understand with no risk of assignment.

Risk , why do you need a dramatic vols incrise to get option gains > than a 1$ with 1$ gain in spot ?
Any ATM ( delta>.5) and Vega of 0.30 will gain more than a 1$ with 200bp gains under the above conditions , no ?