CBOE Theta Vega

8/13/2019 CBOE Theta Vega

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Focusing on Theta and VegaRussell Rhoads, CFA

Instructor The Options Institute

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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.

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Outline

Pricing Factor Review Time Value and Theta

Implied Volatility and Vega

Summary / Q&A

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Option Pricing Factor

Pricing Factors Underlying (Stock or Index)

Strike Price

Time to Expiration Dividends

Interest Rate

Implied Volatility

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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

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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

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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

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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

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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

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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

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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

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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)

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Time Decay

Payoff Diagram

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

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Time Decay

Diagonal Spread VRM @ 40.00

Neutral to slightly bullish outlook for 30 days


June expiration in 90 days

Sell 1 VRM Apr 40 Call @1.60

Buy 1 VRM Jun 35 Call @ 5.90


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Time Decay


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

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Time Decay

Payoff Diagram

-5.00

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

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Time Decay

LEAPS Diagonal Spread VRM @ 40.00

Neutral to slightly bullish outlook for 30 days

Long term bullish


January expiration in 300 days

Sell 1 VRM Apr 40 Call @ 1.60

Buy 1 VRM Jan 30 Call @ 11.25



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Time Decay


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

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Time Decay

Payoff Diagram

-7.00

-6.00

-5.00

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

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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

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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

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Implied Volatility

Historical Implied Volatility S&P 500

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http://www.ivolatility.com/%20%20%20%20/options.j?ticker=SPX:CBOE&R=1&period=12&chart=0&vct=4


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Implied Volatility

Historical Implied Volatility GOOG

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http://www.ivolatility.com/%20%20%20%20/options.j?ticker=GOOG:NASDAQ&R=1&period=12&chart=0&vct=4


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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


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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


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Implied Volatility

Next Day (3 Days to Exp.) No Volatility Change

-2.50

0.00

2.50

5.00

34.30 35.70

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Implied Volatility

Next Day (3 Days to Exp.) 10% Volatility Increase

-2.50

0.00

2.50

5.00

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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

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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

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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

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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?

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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

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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

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Questions / Contact

Questions?

[email protected]

www.twitter.com/russellrhoads

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CBOE Theta Vega