Webinar Presentation How Volatility & Other Important Factors Affect the Greeks

Transcription

1 Webinar Presentation How Volatility & Other Important Factors Affect the Greeks Presented by Trading Strategy Desk 1 Fidelity Brokerage Services, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI FMR LLC. All rights reserved

2 Disclosures Options trading entails significant risk and is not appropriate for all investors. Prior to trading options, you must receive a copy of Characteristics and Risks of Standardized Option, which is available from Fidelity Investments, and be approved for options trading. Supporting documentation for any claims, if applicable, will be furnished upon request. Greeks are mathematical calculations used to determine the effect of various factors on options. The information in this presentation, including examples using actual securities and price data, is strictly for illustrative and educational purposes only and should not to be construed as an endorsement or recommendation. Examples in this presentation do not include transaction costs (commissions, margin interest, fees) or tax implications, but they should be considered prior to entering into any transactions. 2

3 Purpose and objectives The goal of this webinar is to make traders more aware of how volatility can help or hurt their strategies What we will cover: Review of the Option Greeks and Implied Volatility (IV) Impacts of an increase or decrease in IV on Delta Gamma Theta Vega What does it all mean to you as a trader? Introduction to Fidelity option analytics tools 3

4 Review: Option Greeks & Volatility Option Greeks Delta Gamma Theta Vega Measures option's price sensitivity to $1 move in the underlying security Measures change in Delta with $1 move in the underlying security Measures option's price sensitivity to each passing day towards expiration Measures option's price sensitivity to 1% change in IV Exposure Speed Time Volatility Implied Volatility (IV) Market s expectation of movement in the underlying security Measure of how expensive/inexpensive an option contract is What causes IV to increase or decrease? 4

5 Implied Volatility (IV) IV is determined by supply and demand of option Large expected price move Puts and calls are bought to speculate and hedge Increased demand makes options more expensive Higher IV Minimal expected price move Puts and calls are sold to generate income Increased supply makes options less expensive Lower IV 5

6 Implied Volatility (IV) High Implied Volatility Normal Implied Volatility Low Implied Volatility 6

7 Extrinsic Value Option Greeks only affect extrinsic value Aug 65 ITM Call Aug 75 ATM Call Aug 85 OTM Call 7

8 Example Implied Volatility (IV) IV Index chart shows a significant drop in IV Key Statistics shows us that current IV levels are at 0 percentile of its 52 week range Discussion on how an increase or decrease in IV will affect the Greeks 8

9 Impact on Delta ITM Deltas decrease (95 to 87) ATM Deltas stay approximately the same (53) OTM Deltas increase (6 to 16) 9

10 Impact on Delta What does it mean to you? Deltas ITM ATM OTM Increasing IV Decrease Unchanged Increase Decreasing IV Increase Unchanged Decrease 10

11 Impact on Gamma (Deep) ITM Gamma increases (1.441 to 1.992) ATM Gamma (and Near-themoney ) decreases (7.12 to 4.747) (Deep) OTM Gamma increases (2.172 to 2.814) 11

12 Impact on Gamma What does it mean to you? Gamma ITM ATM OTM Increasing IV Increase Decrease Increase Decreasing IV Decrease Increase Decrease 12

13 Impact on Theta ITM Theta increases (1.574 to 4.217) ATM Theta increases (5.008 to 7.495) OTM Theta increases (1.77 to 5.01) 13

14 Impact on Theta What does it mean to you? Theta ITM ATM OTM Increasing IV Increase Increase Increase Decreasing IV Decrease Decrease Decrease 14

15 Impact on Vega ITM Vega increases (2.158 to 4.18) ATM Vega stays approximately the same (7.36) OTM Vega increases (2.392 to 4.658) 15

16 Impact on Vega What does that mean to you? Vega ITM ATM OTM Increasing IV Increase Unchanged Increase Decreasing IV Decrease Unchanged Decrease 16

17 It s All Greek to Me Resources used in this presentation: Active Trader Pro option analytic tools Key Statistics (provided by Livevol, Inc.) Profit/Loss calculator (provided by IVolatility.com) Option chain IV Index Additional Resources: Fidelity.com Learning Center Option Greeks Video (Fidelity Learning Center) Probability Calculator (provided by Convergex) 17

18 It s All Greek to Me This concludes today s presentation. Thank you for attending! To Register, please visit the Fidelity.com Learning Center For additional support, please contact a Fidelity representative at (877)