Options trading

For the retail traders

You have learned in school, on television, or YouTube how to visualize atoms, protons, neutrons, electrons, etc.

This model is entirely inaccurate, yet we use it because it helps us visualize the specifics of these abstract subjects.

Consider everything in this article to be an oversimplification to assist you with more advanced reading about options trading

Abstract subjects
Small intro

I also want to announce I “might” start a blog to independently write articles and maybe write daily or weekly newsletters.

You can subscribe and I will most likely post there more in-depth analyses, articles, and newsletters. I write these articles mainly because it forces me to study more. Explaining subjects to others is a great way to get a deeper understanding.

Why is it that buying options took away all of my of options?

Buying an asset

Linear/delta one payoff.
Linear vs. Non-linear payoff

Shorting an asset

short-selling

Being "short" while the price goes up

FTX 10% Fee Discount

https://ftx.com/#a=1847531

Binance

What is the meaning of Expiration Date?

(source CME group)
The strike price (source CME group)
Call option (right to buy) — Put option (right to sell): (source CME group)

Call options

A call option buyer will profit if the asset price rises above the “strike price.”

A call option buyer will lose his money if the asset price at expiry is below the “strike price.”

A call option buyer will break even if the asset price at expiry is equal to the “strike price.”

Lose money if buying a stock and the price goes down
Profit $50 per share
$5 * 100 = $500

The appeal of options is the “leverage” they provide. Since 1 option contract controls 100 shares of the underlying asset, buying a call option contract exposes the gains and losses of 100 shares at a fraction of the price of 100 shares.

Strike price + the premium

Put options

 $5 * 100 shares = $500 
PNL put option
strike price - premium = $295
$300 $5
Put option vs. call option — payoff mirrored image

In the Money (ITM), Out of the Money (OTM), & At the Money (ATM) — Moneyness

“At the money” (ATM)
“At the money” (ATM) Both a Put and a Call option

OTM (Out of the money)

“Out of the money” call option
“Out the money” (OTM) Call option
“Out of the money” put option

“In the money” (ITM)

“In the money” put option
For upside "strike prices":calls options are "Out of the money" options
Put options are "In the money" options
Call option “in the money” (ITM)

Options maturity (American & European)

American options

European Style vs. American Style (source CME group)

European options

Exercised at expiration vs. Exercised Before the expiration (source CME group)

Settlement procedure (Physical — cash settlement)

Physical settlement

Cash Settlement

Sign up on Deribit and receive 10% discount on fees for trading futures & options: https://www.deribit.com/reg-572.9826

Deribit offers European-style cash-settled options.

Options Pricing

Option pricing graph

Underlying asset’s price (input of the BlackScholes model)

What is the forward price? (input of the BlackScholes model)

Current cash price + Costs of buying now — Benefits of buying now.

If you want more info about the “forward price,” I have a separate blog: https://publish.obsidian.md/rnr/2+forward+pricing/forward+price

The price impact of Interest rates & dividends on the forward price

Time to maturity (input of the BlackScholes model)

Implied volatility (input of BlackScholes model)

Implied volatility video introduction

Options Value

Intrinsic value

current price - strike price
Intrinsic value “In the money” call option (source CME group)
“Out of the money” call option — No intrinsic value (source CME group)
strike price - spot price 

Time value/Theta

Call optionStrike price: $100
Underlying spot price: $120
Intrinsic value: $120 - $100 = $20
This call option is "In the money" (ITM)
Theta decay
Source: CME group
Source: CME group
Source: CME group

“Out the money” (OTM) options example

“Out the money” (OTM) call option — lack of time value

“In the money” (ITM) options example

Call option “In the money” — “Time value.”
“Time value” shrinks/decays closer to expiration and further “in the money.”
The curve above it has very little distance above the hockey stick payoff.
option completely tracks the 45-degree line

“At the money” (ATM) example

“At the money” (ATM) call option contract

Option contract value as it approaches expiry

Call option “In the money” — “Time value.” (source CME group)
“Time value” shrinks/decays closer to expiration and further “in the money.” (source CME group)
(source CME group)
“Out the money” call option
“At the money” call option
“In the money” (ITM)

Options chain

Sign up on Deribit and receive 10% discount on fees for trading futures & options: https://www.deribit.com/reg-572.9826

Options table (click on image to zoom in)
Bid-Ask for Call options on the left side of the options chain
Bid-ask for Put options on the right side of the options chain
“Implied volatility” — Bid & Ask
Call options SPX500
Put options SPX500
Call options, higher strikes, prices dropping.
30023 − 25000 = 5023
5023 + 1264.90 = 6287.9

Disclaimer: Use limit orders when trading options. Don’t use market orders! The spread can be wide and unfair. Check the implied volatility too before making irrational decisions

How to read expirations on the option chain (ByBit example)

ByBit Options (Discount on fees and $100 deposit bonus): https://www.bybit.com/register?affiliate_id=6776&group_id=1653&group_type=1

Trading platform: Delta exchange

Delta exchange

If you’re seeking to signup and want a 10% discount

You can use my referral link

https://www.delta.exchange?code=medium

Trading platform HXRO (Gamified option trading)

Since I give HXRO exposure, I might as well just put my referral link in

DeFi

Final words, announcements, and more

You have learned in school, on television, or YouTube how to visualize atoms, protons, neutrons, electrons, etc.

This model is entirely inaccurate, yet we use it because it helps us visualize the specifics of these abstract subjects.

Consider everything in this article to be an oversimplification to assist you with more advanced reading about options trading

The tail that wags the dog

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derivatives trader

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