Market Masters - How Successful Traders Think, Trade and by Jake Bernstein

By Jake Bernstein

Ebook by way of Bernstein, Jake

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Extra info for Market Masters - How Successful Traders Think, Trade and Invest

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This behavior is evident in most stocks, equity indexes, and the closely followed CBOE Volatility Index. The form of the smile is different for other financial instruments. Currency options, for example, are priced with a symmetrical volatility. Experienced traders sometimes use this information to create a table containing the correct implied volatility for each expiration date and strike price. From the Library of Melissa Wong 34 THE OPTION TRADER’S WORKBOOK 46. Equity and index options expire on Saturday following the third Friday of each month.

Because the same math applies, the put position is also equivalent to 50 shares of long stock. Adding together the number of deltaequivalent shares for both sides gives us a value of 100 shares. Each of the other choices includes options with a net delta greater or less than 1. From the Library of Melissa Wong CHAPTER 1 • PRICING BASICS 37 50. Would the $100 strike price call/put combination of question #49 have still equaled 100 shares of stock if the underlying had been trading at $103? Answer: Yes.

This change almost exactly equals that of 1,000 shares of stock. From the Library of Melissa Wong 38 THE OPTION TRADER’S WORKBOOK 51. How does time decay figure into the value of a synthetic long stock position like that of the preceding two problems? Answer: As expiration approaches, the put delta becomes more negative and the call delta becomes less positive. These changes are revealed in the following table. The first pair of entries contains prices, deltas, and position values for an at-themoney short put/long call combination with 28 days remaining before expiration.

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