Click Here To Join Now. When implied volatility on a stock is low, the gamma of at-the-money options will be high, while the gamma of deep out-of-the-money options will be near zero. Click on any gauge to open a chart of its historical correlation to the stock market, and its use as a possible leading indicator of current stock market trends. This is achieved by buying further strike out of the money call options than a regular Condor spread. The real day trading question then, does it really work?
I think I will spend a lot of time re-reading the first two chapters and referring to later chapters depending on what is happening in the options markets. It would be great for the author to publish a second edition with larger graphics, some improved definitions of IC trade sizes and widths as well as model spread sheets and calculators. What the book does for me is introduce me to trading SPX iron condors when implied volatility is spiking instead of trading ICs on more risky individual stocks.
Waiting until expiration can be risky and costly, he advises. In other words, iron condors are risky trades that must be managed for reasonable profits, not maximized for the ultimate profits unless you can handle the risks involved. Iron condors are not a monthly income strategy, the author warns. Having read numerous books on options and stock trading, I highly recommend Think Like an Options Trader.
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Amazon Inspire Digital Educational Resources. Amazon Rapids Fun stories for kids on the go. Amazon Restaurants Food delivery from local restaurants. ComiXology Thousands of Digital Comics. East Dane Designer Men's Fashion. Shopbop Designer Fashion Brands. Most exchange-traded options are American-style. Arbitrage - The simultaneous purchase and sale of financial instruments in order to benefit from price discrepancies. Option traders frequently look for price discrepancies of the same option contract between different option exchanges, thereby benefiting from a risk free trade.
Read more about Options Arbitrage. Ask Price- As used in the phrase 'bid and asked' it is the price at which a potential seller is willing to sell. Another way of saying this is the asking price for what someone is selling. You buy option contracts and stocks on their Ask price. Read more about Options Prices. Assign - to designate an option writer for fulfillment of his obligation to sell stock call option writer or buy stock put option writer.
The writer receives an assignment notice from the Options Clearing Corporation. Read More About Options Assignment. At the Money - When an option's strike price is the same as the prevailing stock price. Automatic Exercise - When in the money options are randomly and automatically exercised. Read more about Automatic Exercise. Auto-trading - A three way agreement to have your options broker automatically execute trade recommended by your options advisory service.
Read more about Auto-Trading. Backspread - see Reverse Strategy. Read More About Backspreads. Barrier Options - Exotic options which comes into existence or goes out of existence when certain prices has been reached. Bearish Options Strategies - Different ways to use options in order profit from a downwards move in the underlying stock.
Read the tutorial on Bearish Options Strategies. Bear Spread - an option strategy that makes its maximum profit when the underlying stock declines and has its maximum risk if the stock rises in price. The strategy can be implemented with either puts or calls. In either case, an option with a higher striking price is purchased and one with a lower striking price is sold, both options generally having the same expiration date.
See also Bull Spread. Bear Trap - Any technically unconfirmed downward move that encourages investors to be bearish. It usually precedes strong rallies and often catches the unwary. Beta - A figure that indicates the historical propensity of a stock price to move with the stock market as a whole. Bid Price - The price at which a potential buyer is willing to buy from you. This means that you sell at the Bid Price.
Binary Options - Options that either pay you a fixed return when it ends up in the money by expiration or nothing at all. Read more about Binary Options. Black-Scholes Model - A mathematical formula designed to price an option as a function of certain variables-generally stock price, striking price, volatility, time to expiration, dividends to be paid, and the current risk-free interest rate.
Read More About Black-Scholes model. Box Spread - A complex 4 legged options trading strategy meant to take advantage of discrepanies in options prices for a risk-free arbitrage. Learn More About Box Spreads. Break - Even Point-the stock price or prices at which a particular strategy neither makes nor loses money.
It generally pertains to the result at the expiration date of the options involved in the strategy. A "dynamic" break-even point is one that changes as time passes. Breadth - The net number of stocks advancing versus those declining. When advances exceed declines the breadth of the market is inclining. When the declines exceed advances the market is declining. Breakout - What occurs when a stock price or average moves above a previous high resistance level or below a previous low support level.
The odds are that the trend will continue. Bullish - An opinion in which one expects a rise in price, either by the general market or by an individual security. Bullish Options Strategies - Different ways to use options in order profit from an upwards move in the underlying stock. Read the tutorial on Bullish Options Strategies.
Bull Call Spread - A bullish options strategy which aims to reduce the upfront cost of buying call options in order to profit from stocks that are expected to rise moderately. Read the Tutorial on Bull Call Spread. Bull Spread - an option strategy that achieves its maximum potential if the underlying security rises far enough, and has its maximum risk if the security falls far enough. An option with a lower striking price is bought and one with a higher striking price is sold, both generally having the same expiration date.
Either puts or calls may be used for the strategy. Bull Trap - Any technically unconfirmed move to the upside that encourages investors to be bullish. Usually precedes important declines and often fools those who do not wait form confirmation by other indicators. Butterfly Spread - A neutral option strategy that has both limited risk and limited profit potential, constructed by combining a bull spread and a bear spread. Three strike prices are involved, with the lower two being utilized in the bull spread and the higher two in the bear spread.
The strategy can be established with either puts or calls; there are four different ways of combining options to construct the same basic position. Buy To Open - To establish an options position by going long. Read the Buy To Open tutorial. This is achieved by buying further strike out of the money call options than a regular butterfly spread. This is achieved by buying further strike out of the money call options than a regular Condor spread.
Call Ratio Backspread - A credit options trading strategy with unlimited profit to upside and limited profit to downside through buying more out of the money calls than in the money calls are shorted. Read the tutorial on Call Ratio Backspread. Call Ratio Spread - A credit options trading strategy with the ability to profit when a stock goes up, down or sideways through shorting more out of the money calls than in the money calls are bought. Read the tutorial on Call Ratio Spread.
An Options Trading strategy where long term call options are bought and near term call options are written in order to profit from time decay. Read the tutorial on Call Time Spread. Called Away - The process in which a call option writer is obligated to surrender the underlying stock to the option buyer at a price equal to the strike price of the call option.
Read the tutorial on Called Away. Calendar Spread - A type of options trading strategy that uses a combination of options with different expiration dates in order to profit primarily from time decay. Read all about Calendar Spreads. Calendar Straddle or Combination- A complex neutral options strategy involving the purchase of a long term straddle and the sale of a short term straddle. Read all about Calendar Straddle. Calendar Strangle - A complex neutral options strategy involving the purchase of a long term strangle and the sale of a short term strangle.
Read all about Calendar Strangle. Call Options - Options which gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time. Read All About Call Options. Capitalization - The total amount of securities issued by a corporation. Cash Secured Put - Short put options that are fully covered by cash needed in the event of an assignment.
Chain - A list of options quotes across multiple strike prices. Read more about Options Chains. Class of Options - Option contracts of the same type and style that covers the same underlying asset.
Closing Order - The buying back or selling off of an option for which an option trader has the opposite position. An option trader who writes a call option will execute a closing order by "buying to close" that call option.
An option trader who bought a call option will execute a closing order by "selling to close" that call option. Condor Spread - A complex neutral option strategy that profits from a stock trading within a predetermined range.
Contango - A term originating from the oil market. This is when farther month implied volatility is higher than nearer month implied volatility. This is indicative of a normal market condition. Contingent Order - An advanced customizable options order that triggers contingent upon the fulfillment of predetermined criteria.
Read more about Contingent Orders. Contract Size - The amount of underlying asset covered by the option contract. This is generally Contract Neutral Hedging - A static hedging technique involving buying 1 put option or selling 1 call option for every 1 share held. It is most significant at major market turning points. An overall consensus of opinion, whether bullish or bearish, usually marks an extreme.
An investor taking a contrary view will usually benefit in time. Conversion - The transformation of a long stock position into a position which is short the stock using options, without closing the original long stock position, through the use of synthetic positions. Read more about Conversions. Consolidation - When stocks starts going sideways after a significant rise as investors start selling some of their holdings to take profit.
Contract Range - The highest and lowest price that an options contract has traded at. Find out more about Contract Range. Covered Call Write - a strategy in which one writes call options while simultaneously owning an equal number of shares of the underlying stock. Covered Put Write - a strategy in which one sells put options and simultaneously is short an equal number of shares of the underlying security.
Covered Straddle Write - the term used to describe the strategy in which an investor owns the underlying security and also writes a straddle on that security. This is not really a covered position.
Covered Warrant - the term used for structured warrants that works almost exactly the same as call options and put options. Credit - Money received in an account. A credit transaction is one in which the net sale proceeds are larger than the net buy proceeds cost , thereby bringing money into the account. There are many credit option strategies. Credit Spread- A Credit Spread position is an option spread in which the net sale proceeds are larger than the net buy proceeds cost , thereby bringing money into the account.
Read more about Credit Spreads. Day Order - An order that expires at the end of the trading day if it is not executed. Read more about Options Trading Styles. Debit - An expense, or money paid out from an account. A debit transaction is one in which the net cost is greater than the net sale proceeds.
Debit Spread - Option spreads which you have to pay money to put on. Read more about Debit Spreads. Decay - See Time Decay. Deliverables - The financial assets that are delivered to the options holders when options are exercised.
Call options have positive deltas, while put options have negative deltas. Consequently, the terms "up delta" and "down delta" may be applicable. The "up delta" may be larger than the "down delta" for a call option, while the reverse is true for put options.
For more detailed explanation on Delta and other option greeks, please go to Options Delta. Delta Neutral - When positive delta options and negative delta options offset each other to produce a position which neither gains nor decreases in value as the underlying stock moves slightly up or down. Such a position will return a profit no matter which way the underlying stock eventually moves as long as the move is significant.
Delta Spread - A ratio spread that is established as a neutral position by utilizing the deltas of the options involved. The neutral ratio is determined by dividing the delta of the purchased option by the delta of the written option.
Derivatives - A financial instrument whose value is derived in part from the value and characteristics of another financial instrument. Examples of derivatives are options, futures and warrants. Diagonal Call Time Spread - A neutral options trading strategy profiting primarily through time decay by buying long term at the money call options and shorting short term out of the money call options against them.
Diagonal Spread - An options spread on the same underlying, same type but different expiration month and strike. Read the Diagonal Spread Tutorial.
Discount - An option is trading at a discount if it is trading for less than its intrinsic value. A future is trading at a discount if it is trading at a price less than the cash price of its underlying index or commodity. See also Intrinsic Value and Parity. Discount Broker - A brokerage firm that offers low commission rates. Dividend - When a company pays a share of the profit to existing shareholders. This share of profit may be in cash or options. Read about the Effects of Dividends on Stock Options.
Downside Protection - Generally used in connection with covered call writing, this is the cushion against loss, in case of a price decline by the underlying security, that is afforded by the written call option. Alternatively, it may be expressed in terms of the distance the stock could fall before the total position becomes a loss an amount equal to the option premium , or it can be expressed as percentage of the current stock price.
Dynamic Hedging - A hedging technique which requires constantly rebalancing in order to maintain the hedge ratio. Early Exercise assignment - The exercise or assignment of an option contract before its expiration date. Employee Stock Options - Stock options granted to employees by their companies as a mean of compensation and incentive.
Open ended funds tradable over an exchange just like a stock. ETFs made it possible for investors to invest in a variety of other instruments like gold and silver just like investing in stocks.
European Exercise - A feature of an option that stipulates that the option may only be exercised at its expiration. Therefore, there can be no early assignment with this type of option.
Exercise - To invoke the right granted under the terms of a listed options contract. The holder is the one who exercises. Call holders exercise to buy the underlying security, while put holders exercise to sell the underlying security. Read the tutorial on how to Exercise an Option. Exercise Limit - The limit on the number of contracts which a holder can exercise in a fixed period of time. Set by the appropriate option exchange, it is designed to prevent an investor or group of investors from "cornering" the market in a stock.
Exercise Price - The price at which the option holder may buy or sell the underlying security, as defined in the terms of his option contract. It is the price at which the call holder may exercise to buy the underlying security or the put holder may exercise to sell the underlying security.
For listed options, the exercise price is the same as the Strike Price. Expected Return - A rather complex mathematical analysis involving statistical distribution of stock prices, it is the return which an investor might expect to make on an investment if he were to make exactly the same investment many times throughout history.
Expiration Date - The day on which an option contract becomes void. The expiration date for listed stock options is the Saturday after the third Friday of the expiration month. All holders of options must indicate their desire to exercise, if they wish to do so, by this date.
Read the full tutorial on Options Expiration. Expiration Time - The time of day by which all exercise notices must be received on the expiration date. Technically, the expiration time is currently 5: Hence, it is more favorable to implement this hedging strategy when the VIX is low.
In the event that the VIX spiked sharply not impossible, given that the trading range of the VIX is 10 to 50 , the rise in value of the VIX calls can even exceed the losses taken by the portfolio, resulting in a net overall gain.
For the above example, transaction costs are not included in the calculations. Additionally, the following assumptions are made:. Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time Cash dividends issued by stocks have big impact on their option prices.
This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement.
In place of holding the underlying stock in the covered call strategy, the alternative Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date