A derivative is a financial product that derives its value from the value of another asset. The most common type of derivative is the futures contract, which is an agreement to buy or sell an asset at a future date for a predetermined price. Other derivatives include option contracts, which…

The “weighted Vega exposure” lets us quantify our options position with different maturities into a single figure that reflects our total exposure to implied volatility for our options contracts with different maturities. There are opportunities for volatility traders to trade the term structure. Maturity of an option contract and implied volatility The maturity of an option contract refers…

I’ve read something about “liquidity holes,” but it seems like a difficult topic to understand, so I decided to research it. So right now, I am on a noble quest to understand what a “liquidity hole” is. Described by Nassim Taleb in the ’90s. Textbook definition A liquidity hole or…

In an “inverted vol term structure,” the ATM implied volatility term structure is higher for option contacts with shorter maturities and lower for options with longer maturities. When the ATM implied volatility term structure is “inverted,” options with shorter maturities have higher implied volatilities than options with longer maturities. This…

The ATM implied vol term structure is a measure we can use to evaluate the “implied volatility” of the options contracts across all the different maturities. Nonetheless, let’s start with the fundamentals and define what a contango market is. In a contango market, market participants are more willing to pay…

This article will be more of a practical article about how we make an options trade decision. This one will be a little more difficult if you have read the previous articles. This article is more of a bonus article that goes into further detail. If this article gets too…

Vega, commonly known as the “volatility” of an option contract, is our fourth risk consideration while trading options & delta-hedging. Vega is the options greek that measures the sensitivity of an option’s price to a change in “implied volatility”. In the same way, as option contract values are impacted by…

Theta, commonly known as the “time decay” of an option contract, is our third risk consideration while trading options & delta-hedging Theta (Θ) is an important risk to consider when trading options is time decay which is the loss in value of an option contract over time. Understanding “time decay”…

Gamma, often known as the option’s “curvature risk,” is our second risk consideration for trading options and delta hedging with options trading. “Gamma Γ” is the change in “delta” of an option contract for every dollar change in the underlying (i.e., spot). …