A 33 ITM Day

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Good Choice for Beginners!
    Free Trading Education, Free Demo Account!
    Get a Sign-Up Bonus Now!

  • Binomo
    Binomo

    2nd in our ranking!

3/3 ITM: Dow Jones 60 secs

Today like yesterday I didn’t catch the Forex options, they were not available when I sat in front of the monitor, so I took my trades in indices again, in Dow Jones this time, 60 seconds trades. I had a good 3/3 ITM which is nice, I am trying to choose only the solid setups and avoid over trading. Let’s take a look in my results and after than I will expain thesse trades and my setups.

As you can see 3/3 ITM only 60 seconds trades. So let’s go to first screen shot of the day.

I am using free stock charts software and the only indicator I have is a volume indicator. Notice the general picture of the market this hour. A mini- down trend in the beginning of the chart and after that the market is ranging and we have reversal in the white horizontal line which is our resistance.I took all my trades inside the blue rectangle.Take a closer look.

As we have a ranging market now it’s a good time to find reversal opportunities because supports and resistances work well in conditions like this. So, I took a call in my first trade and after that I took 2 puts, all in the money.

As I said my first trade was a call in the first call arrow inside the blue rectangle. Why did I take this trade?First of all there is some space between the price and the resistance line.Now look at the price, I drew a small trendline and it shows that we have a higher high. If you look at the volume you will see that the volume is following the price and we have a higher high,too. So, the price is moving up with increasing volume, there is space for the resistance so I took an ITM call.

My second trade is in the second arrow in the rectancle, a put arrow and this setup is very simple.Ranging market condition, the price hit the resistance and I took a put. Solid ITM.

My third trade, the last arrow inside the blue rectangle, a put arrow,too. The price finally made a reversal but look the red reversal bar. It engulfs the previous green candle. We have an engulfing canddlestick pattern and I took another one put. My last trade was also in the money.

Examining Time Decay When Trading Options

SPY – As the market keeps oscillating, or one could say, “herking and jerking,” over U.S.-China trade talks, Central Bank policy and just general random tweets, there is a heightened sense that we’re reaching a denouement as to whether this now 10-year-old bull market can find another kick higher. Read for details.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Good Choice for Beginners!
    Free Trading Education, Free Demo Account!
    Get a Sign-Up Bonus Now!

  • Binomo
    Binomo

    2nd in our ranking!

Get Free Updates

As the market keeps oscillating, or one could say, “herking and jerking,” over U.S.-China trade talks, Central Bank policy and just general random tweets, there is a heightened sense that we’re reaching a denouement as to whether this now 10-year-old bull market can find another kick higher, or will run into a bear cave.

Option traders that want to bet that one or the other scenarios will payout have been bidding up premium, that is buying both puts and calls, on the assumption that we’ll see a big move heading into the end of the year.

While a decisive break of the current trading range may occur, getting the timing right is the difference between realizing big gains or incurring steep losses.

One of the key components in an option’s valuation is time, which is expressed through theta or time decay.

Let’s look at how theta impacts options and therefore our trading decisions.

Thankfully, it is applied equally to all options regardless of the underlying security. But there is one nuance that needs to be understood. In the options world time curves, accelerating as expiration approaches. Anyone that’s ever been on a deadline can relate to that. The tool we use to define time is called theta, and it measures the rate of decay in the value of an option per unit of time.

There’s a basic math formula used in the Black-Scholes model that is a good starting point. Basically, we use the square root of time to calculate and plot time decay. The math involved in the nitty-gritty of evaluating theta can be extremely complex, so focus on this: Time decay accelerates as expiration approaches, meaning that theta is defined on a slope.

For example, if a 30-day option is valued at $1.00, then the 60-day option would be calculated as $1 times the square root of 2 (2 because there is twice as much time remaining). So all else being equal, the value of the 60-day option is $1.41, or $1 times 1.41 (1.41 is the square root of 2). A 90-day option would be $1 times the square root of 3 (3 because there is three times as much time remaining) for an option value of $1.73. (1.71 is the square root of 3).

If you notice, the premium of the 60 days over 90 days ($0.32) is less than that of the 60 days over the 30 days ($0.41). So again, the important takeaway is to realize that the closer an option gets to expiration, the rate at which time value decays gets faster.

This graph makes the math easier to visualize and also shows that rates of decay are different depending upon whether an option in-the-money, out-of-the-money or at-the-money.

Another conclusion that can be drawn from the above charts is that, if one sells out-of-the-money options with a slightly longer-term horizon, he might plan on covering them before expiration — perhaps just past the half-way point or so. He would do this because a large majority of the time value decay would already have taken place, and therefore, the remaining opportunity would not be as great.

For example, suppose XYZ is trading at 100, and you sell the out-of-the-money combo, utilizing the calls with strike 120 and the puts with strike 80. The following table shows how much (unrealized) profit you would have from the naked sell combo if the stock was still at 100 one month, two months, etc.

Here are some other basic concepts you need to know about theta:

An option theta can be calculated as follows: If a particular option’s theta is -10, and 0.01 of a year passes, the predicted decay in the option’s price is about $0.10 (-10 times 0.01 is 0.10).

At-the-money options have the highest theta. Theta decreases as the strike moves further into the money or further out of the money. In-the-money options are mostly composed of intrinsic value (the difference between the strike price of the option and the market price of the underlying), while out-of-the-money options have a larger implied volatility component.

Theta is higher when implied volatility is lower. This is because high implied volatility suggests that the underlying stock is likely to have a significant change in price within a given time period. A high IV artificially expands the time remaining in the life of the option, helping it retain value.

Time is always moving. In our daily lives, some days seem to pass quicker than others. So too with options.

SPY shares were trading at $291.61 per share on Wednesday afternoon, up $3.08 (+1.07%). Year-to-date, SPY has gained 18.31%, versus a 18.31% rise in the benchmark S&P 500 index during the same period.

Can I buy an out-of-the-money call and then sell it before it reaches the strike price?

I’m new to options trading so if this question does not make sense or is stupidly easy please bear with me. I’ll try to show my thought process through an example.

XYZ is currently trading at $100. I buy a deep out-of-the-money contract of XYZ at a strike price of $120 for $.06 (.06*100) = $6, with 3 weeks until expiration. If XYZ shoots up to $115 the next week, will I be able to “sell” my contract back for a profit (say premium is now $.12)? Or can I not sell an OTM contract until it is ITM?

5 Answers 5

I put in the details of your scenario. I adjusted the volatility to get the price near what you showed.

Next, I dropped the time to 2 weeks. Look what happened –

The stock, still out of the money, but the call jumped to $1.39. If the stock doesn’t keep rising, the price of the calls drops each day and expires worthless. But there’s a chance to sell at a nice gain. 20X your money is nothing to sneeze at. Congrats, if this ever happens to you. (And sell half, before you lose it all. I know)

I’ll add a real life example –

This trade was entered a year ago. It’s a spread. The cost was $3.52/sh with a maximum return of $30/sh. You can see the price is still not in the money, but the stock has moved enough that the spread price has widened to $9.30. A near $6K profit so far.

(Disclaimer – I’ve been trading options a long time, and have a handful of losers as well. This is a cherry-picked example to answer your specific scenario, a profitable option trade for strikes that are not in the money)

Sure you can sell the call before it is in the money. Now, you do have to be aware that its very incertain that you will be able to recoup your investment or make a profit.

You need to understand that as you near the expiration date of an OTM option, it becomes less and less likely that it will become ITM during its remaining life. Consequently, the price of that option is not likely to go up enough to offset your initial bet.

Also, just to be sure you understand, this is a wildly speculative strategy.

The short answer is that you can sell your call any time you want between now and expiration (I should probably stop here :->)

Understanding what the call’s price will be across time and price involves understanding the gamma and the delta of an option. Since that’s higher up the food chain let’s try a numerical example instead of a technical explanation.

The delta of an option is how much the option will change per point of change in the stock XYZ and for a call, it will increase as share price increases. Delta is non linear. The more the stock rises, the more that delta increases. Delta is also a loose approximation of the probability of the option being ITM at expiration. The delta of the call in your example is about 2 which means that the call will appreciate 2 cents for the first dollar XYZ rises (if it happens immediately) and has about a 2 percent chance of being at $120 at expiration. Not very good odds.

Let’s consider three scenarios.

(1) XYZ rises $10 immediately after you buy the call. For the first $1 of rise, your call will increase by 2 cents. For each additional dollar that XYZ rises, the call will increase by 2-1/2 cents, then 3, 4, 5, 6-1/2, 8, 9-1/2, 12, 14-1/2 cents. After a $10 move in the stock, your call might have risen a total of 67 cents (these are theoretical values).

(2) XYZ moves up $10 but it occurs 10 days from now. The initial delta will be about 1 and will increase 1,1, 1, 1-1/2, 2, 2-1/2, 3, 4, 5, and then 6-1/2 cents. Now, you only made 26 cents on a $10 rise.

(3) XYZ rises $10 but it doesn’t occur until the day before expiration (20 days from now). Delta is zero and it will still be zero with XYZ at $110. The call’s price will likely be zero.

While a call purchase like this isn’t as bad as a lottery ticket, in the world of options, it’s the same thing.

Here’s an image of a graph of delta from an image search.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Good Choice for Beginners!
    Free Trading Education, Free Demo Account!
    Get a Sign-Up Bonus Now!

  • Binomo
    Binomo

    2nd in our ranking!

Like this post? Please share to your friends:
How To Start Binary Options Trading 2020
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: