Post on 04-Jun-2018
8/13/2019 CBOE Theta Vega
1/36
Focusing on Theta and VegaRussell Rhoads, CFA
Instructor The Options Institute
1
8/13/2019 CBOE Theta Vega
2/36
CHICAGO BOARD OPTIONS EXCHANGE
CBOE Disclaimer
Options involve risks and are not suitable for all investors. Prior to buying or selling
options, an investor must receive a copy of Characteristics and Risks of StandardizedOptions. Copies may be obtained by contacting your broker, by calling 1-888-OPTIONS,
or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago,
Illinois 60606. In order to simplify the computations, commissions, fees, margin interest
and taxes have not been included in the examples used in this presentation. These costs
will impact the outcome of all transactions and must be considered prior to entering into
any transactions. Multiple leg strategies involve multiple commission charges. Investors
should consult their tax advisor about any potential tax consequences. The information in
this presentation, including any strategies discussed, is strictly for illustrative and
educational purposes only and is not to be construed as an endorsement,
recommendation, or solicitation to buy or sell securities. Supporting documentation for
any claims, comparisons, statistics, or other data in this presentation is available by
calling 1-888-OPTIONS, or contacting CBOE at www.cboe.com/Contact. CBOE and
Chicago Board Options Exchange are registered trademarks and The Options Instituteis a service mark of Chicago Board Options Exchange, Incorporated.
CBOE is not affiliated with Interactive Brokers.
Copyright 2012 Chicago Board Options Exchange, Incorporated. All rights reserved.
2
http://www.cboe.com/Contacthttp://www.cboe.com/Contact8/13/2019 CBOE Theta Vega
3/36
CHICAGO BOARD OPTIONS EXCHANGE
Outline
Pricing Factor Review Time Value and Theta
Implied Volatility and Vega
Summary / Q&A
3
8/13/2019 CBOE Theta Vega
4/36
CHICAGO BOARD OPTIONS EXCHANGE
Option Pricing Factor
Pricing Factors Underlying (Stock or Index)
Strike Price
Time to Expiration Dividends
Interest Rate
Implied Volatility
4
8/13/2019 CBOE Theta Vega
5/36
CHICAGO BOARD OPTIONS EXCHANGE
Option Pricing Factors
Pricing Calculator Example Inputs Output Call Put
Price 51.00 Option Value 1.90 1.10
Strike 50.00 Delta 0.60 -0.40
Days to Exp. 30 Gamma 0.12 0.11
Dividends 1.95% Theta -0.02 -0.02
Interest Rate 1% Vega 0.05 0.06
Volatility 25% Rho 0.01 -0.01
5
8/13/2019 CBOE Theta Vega
6/36
8/13/2019 CBOE Theta Vega
7/36CHICAGO BOARD OPTIONS EXCHANGE
Time Decay
Things to know The passage of time (often) has a negative
impact on the price of options
The rate that an option loses value based on
the passage of time can vary
7
8/13/2019 CBOE Theta Vega
8/36
8/13/2019 CBOE Theta Vega
9/36
CHICAGO BOARD OPTIONS EXCHANGE
Time Decay
Out of the money time decay
0.00
0.50
1.00
1.50
2.00
90 80 70 60 50 40 30 20 10 0
9
8/13/2019 CBOE Theta Vega
10/36
CHICAGO BOARD OPTIONS EXCHANGE
Time Decay
In the money time decay
0.00
0.50
1.00
1.50
2.00
90 80 70 60 50 40 30 20 10 0
10
8/13/2019 CBOE Theta Vega
11/36
CHICAGO BOARD OPTIONS EXCHANGE
Time Decay
Comparison
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
90 80 70 60 50 40 30 20 10 0
11
8/13/2019 CBOE Theta Vega
12/36
CHICAGO BOARD OPTIONS EXCHANGE
Time Decay
At the money time decay
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
90 80 70 60 50 40 30 20 10 0
3.65
3.00
2.10
1.20
12
8/13/2019 CBOE Theta Vega
13/36
CHICAGO BOARD OPTIONS EXCHANGE
Time Decay
Calendar Spread VRM @ 40.00
Neutral outlook for 30 days
April expiration in 30 days
June expiration in 90 days
Sell 1 VRM Apr 40 Call @ 1.60
Buy 1 VRM Jun 40 Call @ 2.80
Net Cost (Debit) = 1.20
13
8/13/2019 CBOE Theta Vega
14/36
CHICAGO BOARD OPTIONS EXCHANGE
Time Decay
Payout at April Expiration
VRM
Short 1 VRM
Apr 40 Call
Long 1 VRM
Jun 40 Call Debit P/L
30.00
35.00
40.00
45.00
50.00
(1.20)
(1.20)
(1.20)
(1.20)
(1.20)
0.00
0.00
0.00
(5.00)
(10.00)
0.10
0.50
2.30
5.75
10.20
(1.10)
(0.70)
1.10
(0.45)
(1.00)
14
8/13/2019 CBOE Theta Vega
15/36
CHICAGO BOARD OPTIONS EXCHANGE
Time Decay
Payoff Diagram
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
15
8/13/2019 CBOE Theta Vega
16/36
CHICAGO BOARD OPTIONS EXCHANGE
Time Decay
Diagonal Spread VRM @ 40.00
Neutral to slightly bullish outlook for 30 days
April expiration in 30 days
June expiration in 90 days
Sell 1 VRM Apr 40 Call @1.60
Buy 1 VRM Jun 35 Call @ 5.90
Net Cost (Debit) = 4.30
16
8/13/2019 CBOE Theta Vega
17/36
CHICAGO BOARD OPTIONS EXCHANGE
Time Decay
Payout at April Expiration
VRM
Short 1 VRM
Apr 40 Call
Long 1 VRM
Jun 35 Call Debit P/L
30.00
35.00
40.00
45.00
50.00
(4.30)
(4.30)
(4.30)
(4.30)
(4.30)
0.00
0.00
0.00
(5.00)
(10.00)
0.30
2.00
5.55
10.15
15.05
(4.00)
(2.30)
1.25
0.85
0.75
17
8/13/2019 CBOE Theta Vega
18/36
CHICAGO BOARD OPTIONS EXCHANGE
Time Decay
Payoff Diagram
-5.00
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
18
8/13/2019 CBOE Theta Vega
19/36
CHICAGO BOARD OPTIONS EXCHANGE
Time Decay
LEAPS Diagonal Spread VRM @ 40.00
Neutral to slightly bullish outlook for 30 days
Long term bullish
April expiration in 30 days
January expiration in 300 days
Sell 1 VRM Apr 40 Call @ 1.60
Buy 1 VRM Jan 30 Call @ 11.25
Net Cost (Debit) = 9.6519
8/13/2019 CBOE Theta Vega
20/36
CHICAGO BOARD OPTIONS EXCHANGE
Time Decay
Payout at April Expiration
VRM
Short 1 VRM
Apr 40 Call
Long 1 VRM
Jan 30 Call Debit P/L
30.00
35.00
40.00
45.00
50.00
(9.65)
(9.65)
(9.65)
(9.65)
(9.65)
0.00
0.00
0.00
(5.00)
(10.00)
3.70
7.05
11.10
15.65
20.40
(5.95)
(2.60)
1.45
1.00
0.75
20
8/13/2019 CBOE Theta Vega
21/36
CHICAGO BOARD OPTIONS EXCHANGE
Time Decay
Payoff Diagram
-7.00
-6.00
-5.00
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
21
8/13/2019 CBOE Theta Vega
22/36
CHICAGO BOARD OPTIONS EXCHANGE
Implied Volatility
Things to know Option prices rise with higher implied volatility
Lower implied volatility results in lower option
premiums
Implied volatility is often used to define whether
options are expensive or cheap
22
8/13/2019 CBOE Theta Vega
23/36
CHICAGO BOARD OPTIONS EXCHANGE
Implied Volatility
Impact of changes
Stock @ 50
15% 25% 35% 45%50 Call 1.50 2.50 3.50 4.50
50 Put 1.40 2.40 3.40 4.40
23
8/13/2019 CBOE Theta Vega
24/36
CHICAGO BOARD OPTIONS EXCHANGE
Implied Volatility
Historical Implied Volatility S&P 500
24
http://www.ivolatility.com/%20%20%20%20/options.j?ticker=SPX:CBOE&R=1&period=12&chart=0&vct=48/13/2019 CBOE Theta Vega
25/36
CHICAGO BOARD OPTIONS EXCHANGE
Implied Volatility
Historical Implied Volatility GOOG
25
http://www.ivolatility.com/%20%20%20%20/options.j?ticker=GOOG:NASDAQ&R=1&period=12&chart=0&vct=48/13/2019 CBOE Theta Vega
26/36
CHICAGO BOARD OPTIONS EXCHANGE
Implied Volatility
What can happen
VRM @ 50.00
Buy 1 VRM 50 Call @ 2.30
One Day Later
VRM @ 51.00
Long 1 VRM 50 Call @ 2.05
Implied Volatility dropped from 40% to 25%26
8/13/2019 CBOE Theta Vega
27/36
CHICAGO BOARD OPTIONS EXCHANGE
Implied Volatility
Long Volatility Pure long volatility trade would be long straddle
VRM at 35.00
Believe implied volatility is too low and should
rise quickly (25% to 35%)
July expiration is in 4 days
Buy 1 VRM Jul 35 Call @ 0.42
Buy 1 VRM Jul 35 Put @ 0.42
Net Cost (Debit) = 0.84
27
8/13/2019 CBOE Theta Vega
28/36
CHICAGO BOARD OPTIONS EXCHANGE
Implied Volatility
Next Day (3 Days to Exp.) No Volatility Change
-2.50
0.00
2.50
5.00
34.30 35.70
28
8/13/2019 CBOE Theta Vega
29/36
CHICAGO BOARD OPTIONS EXCHANGE
Implied Volatility
Next Day (3 Days to Exp.) 10% Volatility Increase
-2.50
0.00
2.50
5.00
29
8/13/2019 CBOE Theta Vega
30/36
CHICAGO BOARD OPTIONS EXCHANGE
Implied Volatility
Quick Quiz S&P 500 @ 1325
Expect 2.5% rally over the next five days
Which is the best 10-day call to purchase?
1325 Call @ 18.00
1350 Call @ 8.00
1375 Call @ 3.00
30
8/13/2019 CBOE Theta Vega
31/36
CHICAGO BOARD OPTIONS EXCHANGE
Implied Volatility
Correct Outcomes
1325 Call 18.00 to 34.75 (+93%)
1350 Call 8.00 to 15.50 (+93%)
1375 Call 3.00 to 4.50 (+50%)
Tie between 1325 and 1350 Calls
31
8/13/2019 CBOE Theta Vega
32/36
CHICAGO BOARD OPTIONS EXCHANGE
Implied Volatility
Quick Quiz #2 S&P 500 @ 1325
Expect 2.5% drop over the next five days
Which is the best 10-day put to purchase?
1325 Put @ 17.30
1300 Put @ 7.50
1275 Put @ 2.55
32
8/13/2019 CBOE Theta Vega
33/36
CHICAGO BOARD OPTIONS EXCHANGE
Implied Volatility
Correct Outcomes
1325 Put 17.30 to 37.05 (+114%)
1300 Put 7.50 to 19.40 (+158%)
1275 Put 2.55 to 8.00 (+213%)
Out of the Money 1275 Put
Why the difference?
33
8/13/2019 CBOE Theta Vega
34/36
CHICAGO BOARD OPTIONS EXCHANGE
Implied Volatility
S&P 500 vs. VIX
10
30
50
70
90
110
600
800
1000
1200
1400
1600
1/2011 5/2011 9/2011 1/2012 5/2012
VIX
S&P 500
34
8/13/2019 CBOE Theta Vega
35/36
CHICAGO BOARD OPTIONS EXCHANGE
Implied Volatility
Summary Implied volatility for options on equities tends to
be forward looking
With respect to index options, implied volatility
tends to be more reactive
35
8/13/2019 CBOE Theta Vega
36/36
Questions / Contact
Questions?
rhoads@cboe.com
www.twitter.com/russellrhoads
36
mailto:rhoads@cboe.comhttp://www.twitter.com/russellrhoadshttp://www.twitter.com/russellrhoadsmailto:rhoads@cboe.com