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How Volatility & Other Important Factors Affect the Greeks

Webinar Presentation

Presented by Trading Strategy Desk

Fidelity Brokerage Services, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917. © 2016 FMR LLC. All rights reserved. 695260.2.1

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Disclosures

– Options trading entails significant risk and is not appropriate for all investors. Prior to trading options,

you must receive a copy of Characteristics and Risks of Standardized Option, which is available from Fidelity Investments, and be approved for options trading. Supporting documentation for any claims, if applicable, will be furnished upon request.

– Greeks are mathematical calculations used to determine the effect of various factors on options.

– The information in this presentation, including examples using actual securities and price data, is strictly for illustrative and educational purposes only and should not to be construed as an endorsement or recommendation.

– Examples in this presentation do not include transaction costs (commissions, margin interest, fees) or tax implications, but they should be considered prior to entering into any transactions.

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Purpose and objectives

The goal of this webinar is to make traders more aware of how volatility can help or hurt their strategies • What we will cover:

– Review of the Option Greeks and Implied Volatility (IV) – Impacts of an increase or decrease in IV on

• Delta • Gamma • Theta • Vega

– What does it all mean to you as a trader? – Introduction to Fidelity option analytics tools

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Review: Option Greeks & Volatility

Delta Measures option's price sensitivity to $1 move in the underlying security

Gamma Measures change in Delta with $1 move in the underlying security

Theta Measures option's price sensitivity to each passing day towards expiration

Vega Measures option's price sensitivity to 1% change in IV

Option Greeks

Implied Volatility (IV) • Market’s expectation of movement in the underlying security • Measure of how expensive/inexpensive an option contract is

Exposure Speed Time Volatility

What causes IV to increase or decrease?

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Large expected price move

Puts and calls are bought to

speculate and hedge

Increased demand makes options more

expensive

Minimal expected price move

Puts and calls are sold to generate

income

Increased supply makes options less

expensive

Higher IV

Lower IV

IV is determined by supply and demand of option contracts

Implied Volatility (IV)

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Implied Volatility (IV) High Implied Volatility

Low Implied Volatility

Normal Implied Volatility

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Extrinsic Value Option Greeks only affect extrinsic value

Aug 65 ITM Call

Aug 75 ATM Call

Aug 85 OTM Call

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Example

Implied Volatility (IV)

• IV Index chart shows a significant drop in IV

• Key Statistics shows us that current IV levels are at 0 percentile of its 52 week range

Discussion on how an increase or decrease in IV will affect the Greeks

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Impact on Delta

ITM Deltas decrease (95 to 87)

ATM Deltas stay approximately the same (53)

OTM Deltas increase (6 to 16)

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Impact on Delta What does it mean to you?

Deltas ITM contracts

ATM contracts

OTM contracts

Increasing IV Decrease Unchanged Increase

Decreasing IV Increase Unchanged Decrease

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Impact on Gamma

(Deep) ITM Gamma increases

(1.441 to 1.992)

ATM Gamma (and Near-the-money contracts) decreases

(7.12 to 4.747)

(Deep) OTM Gamma increases

(2.172 to 2.814)

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Impact on Gamma What does it mean to you?

Gamma ITM contracts

ATM contracts

OTM contracts

Increasing IV Increase Decrease Increase

Decreasing IV Decrease Increase Decrease

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Impact on Theta

ITM Theta increases (1.574 to 4.217)

ATM Theta increases (5.008 to 7.495)

OTM Theta increases (1.77 to 5.01)

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Impact on Theta What does it mean to you?

Theta ITM contracts

ATM contracts

OTM contracts

Increasing IV Increase Increase Increase

Decreasing IV Decrease Decrease Decrease

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Impact on Vega

ITM Vega increases (2.158 to 4.18)

ATM Vega stays approximately the same

(7.36)

OTM Vega increases (2.392 to 4.658)

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Impact on Vega What does that mean to you?

Vega ITM contracts

ATM contracts

OTM contracts

Increasing IV Increase Unchanged Increase

Decreasing IV Decrease Unchanged Decrease

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• Active Trader Pro option analytic tools – Key Statistics (provided by Livevol, Inc.)

– Profit/Loss calculator (provided by IVolatility.com)

• Option chain • IV Index

• Fidelity.com Learning Center • Option Greeks Video (Fidelity Learning Center)

• Probability Calculator (provided by Convergex)

Resources used in this presentation:

Additional Resources:

It’s All Greek to Me

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It’s All Greek to Me

Thank you for attending! To Register, please visit the Fidelity.com Learning Center https://www.fidelity.com/learning-center For additional support, please contact a Fidelity representative at (877) 907-4429.

This concludes today’s presentation.