DEFINITION of 'Iron Condor'

An advanced options strategy that involves buying and holding four different options with different strike prices. The iron condor is constructed by holding a long and short position in two different strangles strategies. A strangle is created by buying or selling a call option and a put option with different strike prices, but the same expiration date. The potential for profit or loss is limited in this strategy because an offsetting strangle is positioned around the two options that make up the strangle at the middle strike prices.
BREAKING DOWN 'Iron Condor'
This strategy is mainly used when a trader has a neutral outlook on the movement of the underlying security from which the options are derived. An iron condor is very similar in structure to an iron butterfly, but the two options located in the center of the pattern do not have the same strike prices. Having a strangle at the two middle strike prices widens the area for profit, but also lowers the profit potential.
Short iron condor
A short iron condor consists of four legs as described above and results in a net credit received. As for profit potential, the maximum potential profit is the initial credit received upon entering the trade. This profit will occur if the underlying stock price, on expiration date, is between the two middle (short) strikes. One of the benefits of a short iron condor (and potentially options in general) is limited risk. For short condors, the maximum loss comes when the underlying stock price drops below the lowest strike (long put) or above the highest strike (long call). If you want an equation for max loss, think of it as the difference in strike prices of the two lower-strike options (or the two higher-strike options) less the initial credit for entering the trade

How Option Delta and Gamma Influence Each Other

How Option Delta and Gamma Influence Each Other
As the market has been very volatile lately. Stocks have been moving in sometimes dramatic on a daily basis so it might be wise to review how option prices change when the underlying changes. The option “greeks” help explain how and why option prices move. Option delta and option gamma are especially important because they can determine how movements in the stock can affect an option’s price.
Option Gamma
The gamma of an option indicates how the delta of an option will change relative to a 1 point move in the underlying asset. In other words, the Gamma shows the option delta's sensitivity to market price changes.
Gamma is important because it shows us how fast our position delta will change as the market price of the underlying asset changes. When you are "long gamma", your position will become "longer" as the price of the underlying asset increases and "shorter" as the underlying price decreases. If you sell options, and are therefore "short gamma", your position will become shorter as the underlying price increases and longer as the underlying decreases.
Option Delta
The delta of an option is the sensitivity of an option price relative to changes in the price of the underlying asset. It tells option traders how fast the price of the option will change as the underlying stock/future moves.
Call Options
Whenever you are long a call option, your delta will always be a positive number between 0 and 1. When the underlying stock or futures contract increases in price, the value of your call option will also increase by the call options delta value. Conversely, when the underlying market price decreases the value of your call option will also decrease by the amount of the delta.
Put Options
Put options have negative deltas, which will range between -1 and 0. When the underlying market price increases the value of your put option will decreases by the amount of the delta value. Conversely, when the price of the underlying asset decreases, the value of the put option will increase by the amount of the delta value.
Option delta and option gamma are critical for option traders to understand particularly how they can affect each other and the position. A couple of the key components to analyze are if the strike prices are ATM, ITM or OTM and how much time there is left until expiration. An option trader can think of option delta as the rate of speed for the position and option gamma as how quickly it gets there.

 

 

 

 

LT BUTTERFLY STRATEGY FOR OCTOBER'2015

BUY 1 LOT LT 1400 CALL @ 101

 BUY 1 LOT LT 1500 CALL @ 43

SELL 2 LOTS LT 1450 CALL @69

Total risk=750

Upper break given point=1550

Lower break given point=1350

PAY OFF TABLE:

DLF STRANGLE STRATEGY

BUY DLF 140 CALL @3.3

BUY DLF 110 PUT @   2.7

COST=6

TOTAL RISK  = 12000

RETURN = UNLIMITED

UPPER BREAK GIVEN POINT=146

LOWER BREAK GIVEN POINT=104

Pay off table:

What Is Options Settlement In The First Place?

Settlement in options trading is the process where the terms of an options contract are resolved between the holder and the writer. In options trading, the holder is the one who owns an options contract and a writer is the person who sold the holder that options contract. Settlement  in call options contracts involve the holders of the options contracts paying the writers for the underlying asset at the strike price. Settlement in put options contracts involves the holder of the options contract selling the underlying asset to the writer at the strike price. After settlement, the options contract will cease to exist and all obligations between the holder and the writer would be resolved.

Settlement can happen under 2 circumstances; Voluntary exercise by the holder or automatic exercise upon expiration.
The holder of an American Style Option could choose to voluntarily exercise their options any time prior to expiration. Once that happens, settlement takes place between the holder and the writer and the options contract is resolved.

What the Option Market Can Tell You about that Stock You Love

For an investor who understands how to read the option market’s tea leaves, investing becomes like playing poker with an opponent who always holds his hand face up. This might seem too good to be true, but in fact, option prices contain within them the market’s consensus estimates for the future price of a stock. If you know where to look, you can easily decide if the market’s consensus price for a stock is near or far from your own idea of its value. Value investors who revel in finding differences between stock prices and intrinsic values will love what the option market can tell them about future expectations for stocks.

What Option Can Tell an Intelligent Investor?
Option pricing models are, first and foremost, statistical models of how stocks are likely to move in the future. The option pricing bit is almost an afterthought once the hard work of stock price forecasting is done. all option pricing models under the general term “Black-Scholes Model” or “BSM.” All subsequent models are basically tweaks of the BSM, in fact.) For all the mathematical complexity people associate with option pricing, it’s actually a pretty blunt tool. It’s based on a few, almost laughably simple assumptions:
1.       The market is “efficient”, so a stock’s market price represents its true value.
2.      Stock prices drift upward at the same rate as the rate of return for risk-free bonds.
3.      New positive and negative information relevant to the stock’s price comes in randomly, so the stock is as likely to go up as it is to go down.
4.      Stock returns follow a bell curve distribution.

 

HOW TO BUY OPTIONS

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Puts, calls, strike price, in-the-money, out-of-the-money — buying and selling stock options isn't just new territory for many investors, it's a whole new language.
Options are often seen as fast-moving, fast-money trades. Certainly options can be aggressive plays; they're volatile, levered and speculative. Options and other derivative securities have made fortunes and ruined them. Options are sharp tools, and you need to know how to use them without abusing them.
Stock options give you the right, but not the obligation, to buy or sell shares at a set dollar amount the "strike price" before a specific expiration date. When a "call" option hits its strike price, the stock can be called away. Conversely, with a "put" option the shares can be sold, or "put," to someone else. The value of puts and calls depends on the direction you think a stock or the market is heading. Stated simply, calls are bullish; puts are bearish.

What is the difference between options and futures?

The main fundamental difference between options and futures lies in the obligations they put on their buyers and sellers. An option gives the buyer the right, but not the obligation to buy (or sell) a certain asset at a specific price at any time during the life of the contract. A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date, unless the holder's position is closed prior to expiration.
Another key difference between options and futures is the size of the underlying position. Generally, the underlying position is much larger for futures contracts, and the obligation to buy or sell this certain amount at a given price makes futures more risky for the inexperienced investor.

The difference between futures and options as financial instruments depict different profit pictures for parties. The gain in the option trading can be obtained in certain different manners. On the contrary, the gain in the future trading is automatically linked to the daily fluctuations in the market. This is to say that the value of profit positions for investors is dependent upon the market position at the close of the trading every day. Therefore, every investor should have a prior knowledge of both futures and options before they enter the financial market operations.

1. A future is a contract which is governed by a pre-determined price for selling and buying at a future period. In options, there is the right to sell or purchase of underlying assets without any obligation.
2. A future trading has open risk. The risk in option is limited.
3. The size of the underlying stock is usually huge in future trading. Option trading is of normal size.
4. Futures need no advance payment. Options have the advance payment system of premiums

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Hedging

Hedging is the practice of purchasing and holding securities specifically to reduce portfolio risk. These securities are intended to move in a different direction than the remainder of the portfolio - for example, appreciating when other investments decline. A put option on a stock or index is the classic hedging instrument Options are a great way to hedge against your existing positions to decrease risk
When properly done, hedging significantly reduces the uncertainty and the amount of capital at risk in an investment, without significantly reducing the potential rate of return.
Hedging is what separates a professional from an amateur trader. Hedging is the reason why so many professionals are able to survive and profit from stock and option trading for decades
Downside Risk
The pricing of hedging instruments is related to the potential downside risk in the underlying security. As a rule, the more downside risk the purchaser of the hedge seeks to transfer to the seller, the more expensive the hedge will be.
Spread Hedging
Index investors are often more concerned with hedging against moderate price declines than severe declines, as these type of price drops are both very unpredictable and relatively common.
The Bottom Line
Hedging can be viewed as the transfer of unacceptable risk from a portfolio manager to an insurer. This makes the process a two-step approach