【Fidelityセミナー受講メモ】Options 101: Session 5 – Option Pricing

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タイトル：Session 5: Option Pricing

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1. Option Price Components

1.1 Option Pricing Basicis

What factors determine an option contract’s premium/price?

• Option Pricing Factors — (1) Stock price, (2) Strike Price, (3) Time to expiration, (4) Interest rate, (5) Dividends, (6) Volatility
• Option Pricing Model
• Option’s Theoretical Price

1.2 Option Valuations

What factors affect the supply and demand for options?

<Demand side>

Stock owners get nervous	Buy options for protection or speculation	Buying pressure raises IV levels
Higher expected move in the security	Higher demand for option contracts	Higher IV levels

<Supply Side>

Rising market improves outlook	Sell options for income	Selling pressure lowers IV levels
Lower expected move in the security	Lower demand for options	Lower IV levels

Implied Volatility:

Implied Volatility (IV) can be used as a measure of an option’s relative value. Supply and demand for option contracts affects IV.

1.3 Review: Premium Components

Premium = Intrinsic Value + Extrinsic Value

An option contract that has intrinsic value is “in the money”

An option contract that has no intrinsic value is “out of the money”

2. Factors that affect price

Factors That Affect Price

• Stock Price
• Time to Expiration
• Volatility

2.1 Underlying Stock’s Price

Major factor in the price of options

• Higher-priced stocks/ETFs will tend to have higher-priced options
  • A $1000 stock will typically have higher option prices than a $5 stock
• We can measure how movement will affect the option contract’s price with the Greeks.*

2.2 Delta

Delta can be used to tell you how much your option contract’s price will change based on a dollar move in the underlying.
It can also give you share equivalency or an approximation of the probability that the option contract will expire in or out of the money.

Example

A long call with a 0.50 delta should move approximately $0.50 with a $1 move in the underlying:

This is the equivalent of being long 50 shares of the underlying, and has a 50% chance of being in or out of the money at expiration.

2.3 Consider Time Decay

Time decay typically accelerates as expiration comes closer, meaning shorter-term options have the highest time decay.

2.4 Theta

Theta tells you how much the option contract’s value should change based on one day’s passage of time.

Example

If you have a theta of 0.05, your option’s price will lose approximately $0.05 of value for one day’s passage of time, all
else being equal.

Greeks are not static! $0.05 loss today could be significantly different next day/week/month.
At-the-money options experience nonlinear time decay, and decay accelerates around the last 30–45 days of the contract’s life.

2.5 What Is Volatility?

Volatility measures the relative price fluctuations of a security.

• Measure of uncertainty (risk)
  • Low volatility > Less movement > Less risk
  • High volatility > More movement > More risk
  
• Measured in annualized percentage terms
  • 10% volatility on a $100 stock means the one-year expected move is + or (–) $10
  
• No bias for direction

2.6 Historical vs. Implied Volatility

Historical Volatility (HV)

• Uses actual pricing data over the specified period
• Measures realized volatility • Can be gauged by looking at a price chart
• Based on number of trading days
  • e.g., HV20 includes 20 trading days’ worth of data

Implied Volatility (IV)

• Derived from the option contract prices on the given security
• Measures expected volatility
• Based on calendar days for a theoretical option

2.7 Consider Event Risk

Historical events affect demand—and in turn, impact volatility.

• Earnings reports
• Product releases
• Drug approvals

2.8 Vega

Vega tells you how much the option contract’s value should change based on one-percentage-point change in Implied Volatility.

Example

If you have a vega of 0.05, your option’s price should gain or lose $0.05 for a one-percentage-point change in Implied Volatility, all else being equal.

Implied Volatility is the “X factor” in options pricing. If there is more demand for an option, IV should increase and, therefore, so will the option’s price. If there is less demand for an option, IV should decrease and thus the option’s price should decrease as well. Again, remember that a change in IV should directly affect the option’s price, but it will also affect all the Greeks.

2.9 Measuring Volatility with Vega

Vega = 0.0535
Theoretically, the option will make $5/contract with each 1% move up in IV and lose $5/contract with each 1% move down in IV.

Example

You are predicting an 8% drop in IV after an earnings announcement.

-8 x 0.0535 x 100 = –$42.80/contract

You are expecting the contract price to go from $2.83 to $2.40 ($2.83 – $0.428) resulting in a loss of $42.80 from the 8% IV drop, with everything else remaining constant.

3. Plan a Trade

3.1 Trade Planning Process

• Reason for Placing the Trade
• Outlook on Price Movement
• Entry Strategy
• Exit Strategy

3.2 Reason for Placing the Trade

Is there an event you should consider?

Earnings Report, Product Releases, Drug Approvals

Trading Implied Volatility or Direction

• Implied Volatility Play: Selling or Buying IV Strategies
  • Don’t forget that the option market is pricing in its expected price movement
• Direction Play: Buying or Selling Strategies
  • Don’t forget about the IV changes that occur around these events

Technical Events

• Trends can take years to develop versus impacts of time decay
• Support and Resistance
• Breakouts

Fundamentals

• Current business environment
• Individual company metrics

Remember — The reason for placing the trade can help define the exit strategy

3.3 Outlook on Price Movement

Are you bullish, bearish, or neutral?

Bullish
• Positive delta option strategies

Bearish
• Negative delta option strategies

Neutral or no directional bias
• Delta close to zero
• Trade is not based on direction, but on time, IV changes, and/or magnitude of price movement

Remember — There is more than one way to trade direction or volatility outlooks.

3.4 Entry Strategy

How do you choose a strike price and an expiration date?

Reason for trade will impact the selected time frame

• Shorter Term: High price acceleration, but more time decay
• Longer Term: Less time decay, but less price acceleration

Buyer or Seller?

• Buyer: Typically, option buyers use further out expirations
  • Time works against long option positions
  • Further-dated expirations reduce the effects of time decay
  • More time for outlook to play out
• Seller: Typically, option sellers will look for 30–60 days to expiration
  • Attempt to balance premium being received with exposure to
  • accelerated time decay
  • Time decay helps short option positions

Remember — Options have a balance of risk and reward. Keep in mind the amount you are willing to risk relative to the account size. Don’t allow trades to get too big.

3.5 Exit Strategy

What are your profit and loss targets?

Establish exit strategy before entering trade

Define risk and reward targets

• Dollar or percentage amount
• Technical signal
• Price level

Consider closing when you’ve reached a specific percentage of max gain

Remember — If your original outlook changes, reassess your exit strategy.

3.6 Key takeaways

• Know what you are trying to trade
• Consider your risk/reward balance
• Use volatility analysis to select an option strategy
• Consider the effect of time on the strategy
• Evaluate strategies with option Greeks
• Establish an exit strategy prior to entering a trade
• Reassess if your outlook changes

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Glossary

Delta: Delta is the sensitivity of an options price to the change in the price of the underlying asset.

Theta: Theta measures the effect that the decrease in time has on an option as it approaches expiration. This is also known as time decay. Theta quantifies how much value is lost on the option due to the passing of time.

Vega: Vega is a measure of an option price’s sensitivity for a given change in implied volatility. An increase in the implied volatility (i.e., the expected volatility) of an option will increase the value of both call and put options, and falling implied volatility decreases the value of both types of options.

Premium: The price a put or call buyer must pay to a put or call seller (writer) for an option contract. Market supply and demand forces determine the premium.

Volatility: A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns.