Besides buying or selling single options, there are many other possible strategies that involve positions in multiple options simultaneously, as well as combining options with positions in the underlying assets.
Besides buying or selling single options, there are many other possible strategies that involve positions in multiple options simultaneously, as well as combining options with positions in the underlying assets. While there are infinite combinations possible, we outline one common combination below.
A long straddle involves buying a
What do long/short positions in put options mean? In the simplest terms, there are four positions an investor can take in options: buying call options (long call), selling/writing call options (short call), buying put options (long put), and selling/writing put options (short put).
The Options Basics Explainer introduced the concepts of call and put options, strike price, expiry, and long or short positions in an option contract. This page looks in more detail at option pricing.
What are options? An option is a type of derivative contract that gives the holder the right to buy or sell the underlying asset at a predetermined price – the exercise or strike price – at or before a certain date. Options exist on a wide variety of underlying assets, like single stocks, indices, ETFs, bonds, currencies, commodities. These contracts can serve as tools to protect a portfolio against potential losses or to express an opinion about the direction of the market.
The Option Greeks are a collection of variables that measure the sensitivity of option prices to changes in underlying factors. Mathematically, they are derivatives of components of option pricing models. Each factor has a Greek letter assigned to it, hence the name ‘Greeks’.
What is an ETF? An ETF – or exchange traded fund – is a fund formed by a basket of underlying instruments that can be traded on the exchange. ETFs are often (but not always) tracking an index and following the index methodology, providing investors a low-cost and efficient way to invest in an index without having to buy all the underlying constituents.
Volatility is an important concept in the context of option trading, but it’s also one of the more complex ones to understand. In financial markets, volatility captures the amount of fluctuation in asset prices and is generally calculated as the annualized standard deviation of daily price changes, normally expressed as a percentage. To convert the annual level of volatility to the daily volatility, the annualized number is divided by the square root of 252 (~16), as there are 252 trading days in a year. An annualized volatility of 16% therefore translates to a daily volatility of 1%, meaning that on a daily basis the price moves on average 1%. It should also be noted that volatility only says something about the degree of price fluctuation, not whether the change is up or down.
