Options trading was once the domain of the institutions, but with the introduction of the Micro E-mini contracts set to launch in August, active traders can finally incorporate all the benefits of the options marketplace into any trading strategy. Over the next couple of weeks, we’re going to take a closer look at this market. Today, we’ll focus on the language and terminology of options.
The Basics of Options
Call: the right, not the obligation, to be long the market from a certain price level.
Put: The right, not the obligation, to be short the market from a certain price level.
Premium: The price paid for the option.
For newcomers to Options, looking at what are referred to as the Greeks gives traders an insight. The five main Greeks, named after Greek letters, are: Delta, gamma, Theta, Vega and Rho.
Delta: The rate of change on the option premium
Gamma: The rate of change on the Delta
If the delta on a market is .6 it would imply a move of 6 points per 10-point move. Gamma gives investors an idea of the speed and velocity of the moves in the market.
A good example is the move in the S&P market in March 2020. When stocks started moving lower off the news of the pandemic, investors ran for protection which drove options premiums higher. The speed of the market drove the gamma on options deltas higher, indicating the risk associated with the moves.
Theta: The time decay associated with the option premium
Vega: The rate of change and sensitivity of volatility on the entire market
Rho: The interest rate for the position
The closer to expiration, the lower the premium. Theta gives traders an indication of the rate of change with the passage of time. The last two are Vega, the rate of change and sensitivity of volatility on the entire market and Rho, the interest rate for the position.
When trading options, understanding premium is crucial. The Greek indicators give you an idea of how the premium is derived. They are tools to be used to find value.
It’s important to understand the financial requirements for the trading of options. If used correctly, incorporating options positions into a portfolio can enhance, protect, and balance exposure simultaneously. The introduction of Micro E-Mini Options now gives active traders an opportunity to manage risk and exposure in an institutional manner.
Watch Jack’s full discussion on options in the video above.