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COSMIC: Options
strategies are as close as we get to individual stock
trading… takes too much dinaro to diversify a stock
portfolio to earn at the same level as using derivative
concepts on futures or options. Using a lot less
cash, we concentrate on the most straight
forward, least confusing, entries in the market. These
"best case" option trade opportunities are
designed to offer high probability entry with specified
exit target or stop.
An
option gives a trader the right to buy or sell the
underlying instrument at the strike price, within a
specific period of time.
A call option gives the trader the right to buy
an entity and a put option gives the trader the right to
sell something.
Financial
Engineering is the practice of using derivatives as building blocks to
create specialized products.
As the field of financial engineering has grown,
the use of options to create synthetic positions and to
hedge cash positions has tremendously expanded.
A
Synthetic Position is the simultaneous
buying and selling of opposite options.
For example: if a trader feels that the price of
the underlying instrument is going to decrease but does
not want to take a short position in fear of a
short-term rally, he or she could buy one put and sell
one call at different strike prices and time frame.
The
premium is the price of the option and is composed of
two elements: intrinsic value and time value.
An option
is said to have intrinsic value if the option is in-the-money.
When out-of-the-money, its intrinsic value is zero.
The
intrinsic value for an in-the-money option is calculated
as the absolute value of the difference between the
current price
(S) of the underlying
and the strike
price (K) of the option, floored to zero.
IV = max{0, | S − K | }
More
specifically, for a call option IVcall
= max{0,S − K}
while
for a put option Input = max{0,K − S}
For
example, if the strike
price for a call option is USD
1 and the price of the underlying is USD 1.20, then the
option has an intrinsic value of USD 0.20.
The
total value of an option is the sum of its intrinsic
value and its time
value (intrinsic
value 9). We prefer to use options in several
strategies from creating artificial stops, to taking
advantage of markets that are at extremes, and to
generate consistent profit by writing options that are
counter trend, which are selected by using delta and
applying some specific formulas to the option Greek.
The delta
measures the sensitivity to changes in the price of the
underlying asset. The Δ
of an instrument is the mathematical derivative
of the option value V
with respect to the underlyer's price:
DISCLOSURE:
The
High Degree of Leverage Often Obtainable in Commodity
Trading Can Work against You As well As for You. Use of
Leverage Can Lead To Large Losses As Well As Gains.
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