36 ; tdameritrade.com ; SUMMER 2017
16 tdameritrade.com SUMMER 2017
BIG IDEA: TRADERS ANXIOUSLY A WAIT THE RELEASE
OF ECONOMIC DATA, BUT SOME ECONOMIC INDICATORS
CREATE MORE NOISE THAN OTHERS. HERE
ARE FOUR TO GET YOU STARTED. KNOW THEM, LOVE
THEM, CONSIDER INCORPORATING THEM INTO YOUR ROUTINE.
WORDS BY JAYANTHI GOPALAKRISHNAN
PHOTOGRAPHS BY FREDRIK BRODÉN
FROM DATA TO TRADE
• EAS Y/ TAKE A WAY: Learn to create trading strategies based on how markets might react to economic data.
• A defined-risk, short spread strategy, constructed of a short put vertical and
a short call vertical. You assume the underlying will stay within a certain range
(between the strikes of the short options). The goal: as time passes and/or volatility drops, the spreads can be bought back for less than the credit taken in or
expire worthless, resulting in a profit. The risk is typically limited to the largest
di;erence between the adjacent and long strikes minus the total credit received.
At the money (ATM)
An option whose strike is “at” the price of the
underlying equity. Like out-of-the-money options, the premium of an at-the-money option
is all “time” value.
A defined-risk spread strategy, constructed
by selling a short-term option and buying a
longer-term option of the same type (i.e., calls
or puts). The goal: as time passes, the short-er-term option typically decays faster than
the longer-term option, and profits when the
spread can be sold for more than you paid
for it. The risk is typically limited to the debit
A measure of an option’s sensitivity to a $1
change in the underlying asset. All else being
equal, an option with a 0.50 delta (for example) would gain 50 cents per $1 move up in the
underlying. Long calls and short puts have
positive (+) deltas, meaning they gain as the
underlying gains in value. Long puts and short
calls have negative (–) deltas, meaning they
gain as the underlying drops in value.
A measure of what an option’s delta is expected to change per $1 move in the underlying.
The market’s perception of the future volatility of the underlying security, and is directly
reflected in an option’s premium. Implied
volatility is an annualized number expressed
as a percentage (such as 25%), is forward-looking, and can change.
In the money (ITM)
An option whose premium contains “real”
value, i.e., not just time value. For calls, it’s any
strike lower than the price of the underlying
equity. For puts, it’s any strike that’s higher.
Out of the money (OTM)
An option whose premium is not only all
“time” value, but the strike is away from the
underlying equity. For calls, it’s any strike
higher than the underlying. For puts, it’s any
strike that’s lower.
When the holder of an option exercises their
right to buy or sell as stated in their contract.
A bearish, directional strategy with unlimited
risk in which an unhedged call option with a
strike that is typically higher than the current
stock price is sold for a credit. The strategy assumes that the stock will stay below the strike
sold; in which case, as time passes and/or
volatility drops, the call option can be bought
back cheaper or expire worthless, resulting in
A trading position involving puts and calls
on a one-to-one basis in which the puts and
calls have the same strike price, expiration,
and underlying asset. When both options are
owned, it’s a long straddle. When both options
are written, it’s a short straddle.
Standardizing a portfolio’s positions into one
A measure of an option’s sensitivity to time
passing one calendar day. For example, if a
long put has a theta of -0.02, the option premium will decrease by $2 per option contract.
A measure of an option’s sensitivity to a 1%
change in implied volatility.
Vertical , Call Vertical, Long Call Vertical
A vertical is an option position composed of
either all calls or all puts, with long options
and short options at two di;erent strikes. The
options are all on the same stock and of the
same expiration. Long call verticals are bullish
and composed of call options. Call verticals are
composed of call options.
VIX (CBOE Volatility Index)
The de facto market volatility index used to
measure the implied volatility of S&P 500 index options. Other wise known to the public as
the “fear index,” it is most often used to gauge
the level of fear or complacency in a market
over a specified period of time. Typically, as
the VIX rises, option buying activity increases,
and option premiums on the S&P 500 Index
increase as well. As the VIX declines, option
buying activity decreases. The assumption is
that greater option activity means the market
is buying up hedges in anticipation of a correction. However, the market can move higher or
lower, despite a rising VIX.