Mindblown: a blog about philosophy.

Conversions and Reversals are the trader’s favorite tool for risk management. It is most accurately described as a quasi-arbitrage that options traders rely on for pricing purposes as well as for its risk management functions. The synthetic relationships that puts and calls have to each other has already beer seen in the previous section. This […]

Synthetics: When I first started trading options I used to have a little card written with this on it. Basically it is Two or more trading vehicles packaged together to emulate another pricing vehicle or spread. Because the package involves different components, price is also different, but the risk is the same. So, for example, […]

1. Long puts give you bearish speculation with fixed, limited risk. • Long a put will give you (upon exercise) the control over 1 future sold short. A long put has risk limited to the initial cost of establishing the position. • A long put has potentially unlimited gains as long as the price of […]

1. Long calls are bullish speculation with fixed, limited risk. In futures options, cach options contract typically represents one underlying future. A long call gives you control (upon exercise) of long 1 future. A long call position has risk limited to the initial cost of establishing the position. A long call position has unlimited upside […]

The value of an option depends mainly on two things: The likelihood that the option will finish in the money. The difference between the underlying price and the option’s exercise pric if the option does finish in the money. Effectively, the value of an option depends on the distribution of possible underlying prices, which depends […]

The following are the most common inputs to any options pricing model and are the most important factors influencing the options total premium. Exercise price-a benchmark for an option’s intrinsic value, it is also known as the strike price of the option. As mentioned above, the exercise price is the price at which you will […]

Definition: A call option is a contract between a buyer and a seller whereby the instrument at a fixed price on or before a fixed date, should the buyer of the call buyer acquires the right, but not the obligation, to buy a specified underlying wish to exercise the option. The seller of the call […]

Definition: The underlying is the instrument to be delivered in the event an option is exercised. An underlying can be a stock or shares of stock, an index, a futures contract, or a cash commodity. The amount of underlying for each option contract will depend upon the security traded and its specifications. For example, in […]