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Martin,
I must declare that I am no expert but I could share the theory of
hedging on stock using option.
I presumed that you already own a long position in stock and you want to
maintain that stock at a specific price, say you own 100 shares of ABC at
$50. To hedge the long position, you can buy puts as an insurance against
the drop in long position price. This is where the GREEKS come into play,
i.e., Delta, which is the rate of change of an option with respect to a
change in underlying. As you know, a long position in stock has a delta
of 1. So you must buy put at $50 strike price, assuming at that strike
price, its delta is 0.25, then you need to buy 4 contracts. If each
contract worths $2, then the total cost would be (4 X 2 X 100)= $800.
Once this is achieved, you have attained a net position delta equals to
zero, which is perfect hedge. However, in practice, you can't achieve
perfect match, something close is good enough.
How did the Puts protect the long position ? I assumed you understand the
risk/reward chart of put. The max risk is the $800 premium paid if the
underlying price goes above the strike price and option will expired
worthless. The reward is unlimited if the underlying price falls below
the strike price(more specific B/E point), the puts will rise in value
proportionately according to the option delta.
By purchasing puts worth $800 premium, you have ensured that no matter
what happens to the price of stock, you will be able to sell 100 shares
of ABC for $50/share. If the stock price declines, two actions you can
take. Sell the put options(that is gaining value) for a profit or
exercise the put contracts for your right to sell the underlying at $50.
Whichever situation is best you have to do the maths to maximize your
return.
A word of caution, option is a very risky instrument, as it involves
expiration unlike stock. Your premium paid is not retrievable unless the
option is performing well. The beauty in option is the leverage you
enjoyed if you can predict the direction correctly, your outlay is much
lower than in stock. Imagine a small premium of $200 can control 100
shares of stock, if share price is %50, you are controlling $5000 worth
of stock with $200 premium. By saying that, I hope I'm not soliciting
traders to jump into option trade, you are doing it at your own
risk.
Like to learn from you on point and figures, is it effective tool
?
That's all folks.
Best Regards
Freddie Ng
At 07:43 PM 4/8/2003 -0400, you wrote:
Freddie
Pablo
I was wondering if you could help with a few
beginner type questions?
I just became interested in Options and was
thinking of using it as a hedge as well as short term.
I am hearing rumors from many different areas
that the bottom will be in 2006. One chart actually mentions Dec 26 2006
and a 50% drop from here. I though a simple put on the DOW and NASDAQ
would act like a good hedge for my long positions. Using 5k as an
example for two PUTS leaps. First terminology. How would you state that.
Buy a.... contract on the ???
For a PUT on the DOW does drop 50% I would be
up how much? Obviously if I am wrong it is all gone.
I suppose if felt really strongly about this I
could by Call options on Gold
I was following ticker (VESA )
UESQD.X PUTS late last week and noticed it is now at 1.90 up from
1.60. If one was used to taking 10k positions on a stock could one now
take 2k positions. If so I would assume the most would lose is 2k if it
expired.
BTW I am back to using point and figure
charts.
Regards Martin
----- Original Message -----
From: Freddie Ng
To: Metastockusers@xxxxxxxxxxxxxxx
Sent: April 08, 2003 12:18 AM
Subject: Re: [Metastockusers] Stock Option
Pablo,
Thanks for the advise for buy/sell on volatility. You are right, the IV high-low must have a base for reference, otherwise it is meaningless. If we can have a historical volatility of the option IV, that should serve our purpose, right ?. Apply IV/HV will then yield the ratio, if ratio <1, buy and if ratio is >1 sell. Is this what you use ?
Thanks for the Meta HV formula, on comparison, I realize I had it programmed in my indicator already. It was kind of you to point out that HV is for stock and not on option. I would have taken it for option.
The IV indicator you mentioned is referring to the "option volatility" in the indicator drop down menu ?
As for the Greeks, as an example, say you bought a call, its price will rise dollar for dollar with the stock if delta is 1, if the delta is near to zero, even if the stock gap up, you would not see any up price in option. Such position should be disposed asap. Delta of 0.5 has the max time value with no intrinsic value. If trade is against your direction, for every dollar of stock decline, option will fall by 50cts. Direction is abstract if we can forecast direction accurately, buy simple call and put will be neat, forget about other complex strategies in options. Then we will enjoy the leverage in options, less outlay and high % return. However, volatility could override greeks.
Best Regards
Freddie Ng
At 11:54 PM 4/7/2003 -0300, you wrote:
I actually didnt mention specific options soft on account your request was related to metastock capabilities and use for options, the best options soft is optionvue, or you can use the web service of www.optionetics.com.
there is other site like www.IVolatility.com
forget about the greeks in my experience they dont add anything crucial to your trading, but volatility is crucial, this was the reason i used the ip/hv ratio when i was still investing in options in the american market
mostly you must buy low volatility and sell (or write) high volatility, but the problem is high or low comparing to what, so i started to use the ratio to spot it fast, i dont have the exact code for the ratio with me, but you can find the iv indicator on metastock quick indicator list and for the hv i usethis formula:
Std(Log(C/Ref(C,-1)),10)/Std(Log(C/Ref(C,-1)),100)
make notice that while the implied is calculated based on the option price the hv is calculated on the underlying.
about the group/industry ranked by their volatility, you can find in the sites mentioned by me and debra that infomation
i never used it but optionetics is very much discussed and recommended inoptions boards and usenet groups, but as a rule you should check the cboe site
Bye
----- Original Message -----
From: Freddie Ng
To: Metastockusers@xxxxxxxxxxxxxxx
Sent: Sunday, April 06, 2003 10:13 PM
Subject: Re: [Metastockusers] Stock Option
Pablo,
Appreciate your valuable systematic explanation. Those points that you discussed were very important in option trading. If it can determine or anticipate the correct underlying direction, this info can then be used to interpret the option direction. Call follows underlying while Put is reverse. I also understand that not all indicators are suitable for each stock and Metastock can search and match the best indicator to optimized profit, I wonder if I had missed out anything in Metastock for option.
Volatility(implied and Historical)
Keen to know how you use these info to analyze the option. I am aware that one can lost trade due to volatility. You mentioned about use ratio of IV & HV, can you elaborate a little bit more. The option volatility indicator is for IV, how do you obtain HV in Metastock.
Btw, do you have any good source where I can obtain the volatility info. Is there any such listing of group/industry ranked by their volatility.
Best Regards
Freddie Ng
At 04:07 AM 4/5/2003 -0300, you wrote:
Freddie,
on using metastock for options you have 2 problems
1 Data problem
2 analysis problem
1 since options trade for a short period, the problem arises, you cannot
make any analysis for a while, there is 2 ways around it : continuos
contracts (i tried them for a while , but they are not reliable in my
opnion), the alternative is using intraday data, so even if you can make
analysis on daily charts for a while, at least you can run intraday an.
2 about the analysis:
you must keep an eye on the stock or whatever the option is for
then you can analyze the option itself by common tech an. tools
then you have to keep an eye on implied volaitity and hystorical volatility,
for while i used a ratio between the implied volatility and hystorical
volatility
check the quick drop indicator youll find some options indicators
Pablo
----- Original Message -----
From: "freddie_ng" <n07476@xxxxxxxxxxxxxx>
To: <Metastockusers@xxxxxxxxxxxxxxx>
Sent: Saturday, April 05, 2003 2:00 AM
Subject: [Metastockusers] Stock Option
> Hi all Metastock experts,
>
> Can anyone enlighten me how to make use of Metastock to trade on
> options. I own a Metastock ver 8.0, just recently upgraded from v7.2.
>
> Best Regards
> Freddie Ng
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