Category: Options Trading Basics

The Dummies Guide To Option Greeks

The Dummies Guide To Option Greeks

There you are in a conversation with a professional trader about their strategy and suddenly the “inside baseball” terms start rolling off their tongue – Delta Hedging, Short Gamma, Theta Burn, and Vega Risk.  You smile and nod without perhaps knowing exactly what these terms mean, and just like that, what started as a good […]

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Mean Reversion: What Stocks And NFL Teams Have In Common

| September 7, 2016 | 0 Comments
Mean Reversion: What Stocks And NFL Teams Have In Common

By studying the long-term performance of professional sports teams, investors can gain a sense of a stock’s future returns. Mean reversion controls stock market returns as much as the outcome of sports competitions. It’s easy for sports fans to assume a championship team will continue its stellar performance into the next season. It’s equally easy for investors to extrapolate a […]

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Key Metrics: Price To Sales Ratio

| July 27, 2016 | 0 Comments
Key Metrics: Price To Sales Ratio

Today I want to take an in-depth look at what James O’Shaughnessy, author of What Works on Wall Street, found to be the best historical value metric… the price to sales ratio. I’ll discuss how to calculate it, what it tells us, and how you can incorporate the metric in your investing approach. What Is Price To […]

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Option Basics – Debit Spreads

| April 27, 2016 | 0 Comments
Option Basics – Debit Spreads

It’s time for the third installment in our tutorial series on option theory. In the last two installments we we covered option basics and then did our best to give you a head start on how to interpret option greeks. Today we’re going to jump right into debit spreads and explain why they often may be preferable to trading […]

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Option Basics – The Greeks

| April 20, 2016 | 0 Comments
Option Basics – The Greeks

It’s time for the second installment in our option basics tutorial series. Today we are going to cover the option greeks – which is commonly considered a dry topic. Well that was until now –  so grab a short sword and a bottle of body oil because you’re going to need it down in the dusty arena when […]

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Option Basics

| April 15, 2016 | 0 Comments
Option Basics

In the context of reintroducing option related strategies here at Evil Speculator I find it important that we establish a baseline of fundamental option related concepts for everyone. Perhaps you’ve never traded options before or maybe you’re just a bit rusty and could use a refresher. So let’s start with the very basics: WHAT IS AN OPTION […]

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Herding Bias

| March 23, 2016 | 0 Comments
Herding Bias

Something very interesting happened during our trip back to Valencia last Sunday. After checking our luggage and passing through the airport’s security procedures we had a bit of time to spare and decided to grab lunch at a promising looking grill restaurant. As we picked our table my wife noticed a black  Samsonite suitcase that apparently […]

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Loss Aversion

| March 9, 2016 | 0 Comments
Loss Aversion

The tendency to treat money that has already been committed or spent as more valuable than money that may be spent or acquired. Imagine two traders trading the very same stock. One one side we have Mr. Toro who buys 1000 shares of Evil Corp. (ELVC) and on the other side there’s Mr. Grizzle who decides to go […]

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Making Money With Trend Tracking

| September 25, 2012 | 0 Comments
Making Money With Trend Tracking

One of the reasons that we created the Option Trading Research tracking system was to identify and track companies that have growth potential.  And to show us where a lot of option buying is coming from.  One such area we used to track before we created this system was companies like the makers of obesity […]

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Stock Heading To Zero… What To Do

| September 4, 2012 | 0 Comments
Stock Heading To Zero… What To Do

Sometimes a stock has been beaten down so much that it seems destined to hit zero. However, even if we are eventually right about the direction, it can be very difficult, if not outright dangerous, to attempt to profit from this type of situation before the company goes bust. Why, what’s the risk? One of […]

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A Professional Way To Measure A Stock

| August 28, 2012 | 0 Comments
A Professional Way To Measure A Stock

Lately I hear a lot of people talking about value investing, but see very few actually practicing it. Here’s the kicker… Once your asset base reaches a certain level, I believe that it’s almost impossible to manage this style effectively. Therefore, I’ve been working diligently to further automate my research process. It seems that yellow […]

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No More Vacation For Traders

| August 21, 2012 | 0 Comments
No More Vacation For Traders

Every man who possibly can should force himself to a holiday of a full month in a year, whether he feels like taking it or not. –William James It seems that the vacation season is having little impact on the market this summer.   I can say this with confidence because the S&P 500 continues to […]

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Don’t Think About It Too Much

| August 14, 2012 | 0 Comments
Don’t Think About It Too Much

“The Gods Must Be Crazy” is a great 1980’s film that contrasts the frenzy of modern existence with the calm of African tribal life.  In one of its very first scenes, a woman turns to the main character and asks, “Does the noise in my head bother you?” The point, of course, is that some […]

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Putting Bonds On Warning?

| July 31, 2012 | 0 Comments
Putting Bonds On Warning?

There’s no question that the market continues a tight tug of war between risk aversion and risk appetite. On one hand, the bulls stress the value of equities and oppose the extreme levels of negativity toward them.  By almost every measure, they’re cheap relative to the alternatives. On the other hand, we’ve all heard the […]

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Buy Stocks Or Buy Bonds?

| July 24, 2012 | 0 Comments
Buy Stocks Or Buy Bonds?

The Financial Times ran a story of profound importance last week, but few noticed. They reported that some brokers, including Merrill Lynch, believe that stocks are actually becoming safer long-term investments than government bonds.  For some of you, this probably comes as no surprise since the 10 year Treasury note is only yielding 1.45%.  In […]

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The Secret Between Trading Options And Gambling?

| July 17, 2012 | 0 Comments
The Secret Between Trading Options And Gambling?

In Chicago, home to the CBOE, many people do know who an option trader is.  But that’s clearly not the case in other parts of the country. There are many traders and investors alike that believe an option trader is no different than a poker player. Let me say that some of you will immediately […]

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It’s Time To Buy Apple

| July 10, 2012 | 0 Comments
It’s Time To Buy Apple

I’m the first to admit that I’ve been late to the Apple (AAPL) party.  But my tune has changed; I’m now onboard. However, before I jump into the details, let me tell you why… The main reason was complacency and stubbornness.  Going all the way back to July 2006, I had eyed the pullbacks in AAPL […]

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Stay Away From This Volatility Play

| June 26, 2012 | 0 Comments
Stay Away From This Volatility Play

With the S&P 500 whipsawing these days, you can’t turn on any TV business program without hearing about volatility.  Anchors are talking about how it’s on the rise and next, how it’s falling. They also relentlessly talk about how being long volatility is the ideal stock portfolio diversification and hedge.  Many investors have been looking […]

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Do You Repair Or Do You Hedge Your Stock Position?

| June 12, 2012 | 0 Comments
Do You Repair Or Do You Hedge Your Stock Position?

I’ve recently mentioned 1,310 on the S&P 500 as a level to watch. Now my focus is simply on 1,300 and if it can hold that level. Again today is another gap up day with immediate weakness. Yesterday, the S&P 500 stabilized for a bit in early trading with 1,317 as the trading area.   But […]

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Where To Hide In This Uncertain Market

| June 5, 2012 | 0 Comments
Where To Hide In This Uncertain Market

What is an investor to do in this wild market? Should you liquidate your portfolio and run the risk of missing an uptrend like last year?  Or do you stay in? These are questions that have plagued investors for decades. Last week, I suggested that we needed to buy and stay in defensive stocks.  These […]

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What Should You Do In A Broken Market?

| May 22, 2012 | 0 Comments
What Should You Do In A Broken Market?

I am rarely surprised by market movement. It’s normally a simple supply/demand equation. But I am surprised at the repeated behavior that exists in certain time frames. For example, short-term market indicators are currently at extreme oversold levels, similar to what we saw in early October 2011, August 2011, March 2011 and fall/summer 2010. Does […]

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Professional Investors Don’t Need To Be First To The Party

| May 15, 2012 | 1 Comment
Professional Investors Don’t Need To Be First To The Party

If you’ve been long stocks, you can’t be happy about the market’s recent price action. Sadly, the S&P 500 has gapped down at the market open for eight out of the last nine days. Obviously, this is a very troublesome market. However, even in a market that’s acting poorly, there are always investors who can’t […]

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Hedging Your Portfolio Is Vital!

| May 8, 2012 | 0 Comments
Hedging Your Portfolio Is Vital!

Unfortunately my family just suffered a tragedy.  So, I took the last few trading days off to spend some well needed time with my wife and kids. What’s even more unfortunate is that it happens to every family at one point or another.  And the last thing you need to worry about during these times […]

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Stock Options

| April 17, 2012 | 0 Comments
Stock Options

A stock option is simply the right to buy or sell a specific stock at a certain price for a limited period of time. The stock in question is known as the underlying security.  To explain stock options properly, we need some more information… There are two basic types of stock options… a call option […]

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Risk Graphs

| April 13, 2012 | 0 Comments
Risk Graphs

Risk graphs are the graphical representation of the underlying risk of a stock and/or option position.  In this article, we’re discussing an option risk graph. In order to understand the inherent risks of an option position, traders can use a risk graph to see the profit/loss possibilities of certain outcomes. For example, if a trader […]

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Option Trading Brokers

| April 11, 2012
Option Trading Brokers

A broker or brokerage firm is a financial institution.  They’re a trader’s main point of contact with the options markets. Traders open and fund accounts with the broker.  Brokers place option trades at the request of the trader.  These requests can be made in person, over the phone, or via the internet. Since your broker […]

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Option Greeks

| April 9, 2012 | 0 Comments
Option Greeks

Option Greeks are metrics used to more precisely understand the behavior of an option’s price.  In a nutshell, they measure the sensitivity of an option’s price in relation to several different factors.  Those factors include underlying stock price, interest rate, volatility, and time decay. Traders use Option Greeks to analyze changes in the price of […]

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Long Term Equity AnticiPation Securities (LEAPS)

| April 4, 2012 | 0 Comments
Long Term Equity AnticiPation Securities (LEAPS)

LEAPS is the name given to long term options.  A LEAPS is nothing more than a listed call or put option that is issued with two or more years of time remaining until expiration.  Other than that, they’re not much different from regular options. Let’s take a closer look at the basics of LEAPS: Type:  […]

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Intrinsic Value, Option Premium

| April 2, 2012 | 0 Comments
Intrinsic Value, Option Premium

Option Premium can be best described as the cost of an option.  To many, understanding options premium can be intimidating.  While it may seem like there are many variables that go into premium calculation, the reality is there are two parts that make up the value.  Moreover, there are three distinct variables affecting the value of […]

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Implied Volatility

| March 29, 2012 | 0 Comments
Implied Volatility

Implied volatility is an option-specific term.  Implied volatility is the market’s measure of the future volatility of an underlying asset.  If that sounds complicated, let me break it down for you… There are four major factors affecting an options price.  These factors are volatility, time decay, probability, and interest.  Dividends can also come into play, […]

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Hedge Ratio

| March 27, 2012
Hedge Ratio

A hedge ratio is the overly complicated term for a rather simple idea. Essentially, the hedge ratio refers to the delta of an option.  Delta is the amount by which the underlying option will change in price for small changes in the stock price. Remember, an option with a delta of 0.50 means the option […]

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Buy To Open, Sell To Close, Sell To Open, Buy To Close

| March 23, 2012 | 0 Comments
Buy To Open, Sell To Close, Sell To Open, Buy To Close

In stock and option trading, there are multiple ways to establish a position in the market. But there are only two ways to enter any particular order into the market- either long or short.  In this article, we’ll discuss how different buy/sell orders establish a market position in a theoretical option trade. Buy to open […]

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Black Scholes Model

| March 21, 2012 | 0 Comments
Black Scholes Model

The Black Scholes Model is a mathematical formula used to derive the price of an option.  It’s based on the value of certain key variables or inputs.  These inputs include stock (or other asset) price, strike price, time to expiration, volatility, dividends (if any), and current interest rate. The actual Black Scholes equation is fairly […]

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Online Options Trading

| March 7, 2012 | 1 Comment
Online Options Trading

The ability to trade options online has revolutionized the options trading industry. Back in the day before computers and electronic trade execution, options were the realm of professional traders. Floor traders screamed out numbers and used hand signals in an open-outcry system to trade options amongst other professional traders. To place a trade from anywhere […]

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Market Makers

| February 28, 2012 | 0 Comments
Market Makers

Market Makers are individuals or representatives of firms who have a contractual relationship with the options exchange to ensure a fair and orderly two-sided market for the options to which they are assigned to make a market. Market Makers must be members of the exchange, pay dues, and either own or lease a seat on […]

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At The Money Options

| February 28, 2012 | 0 Comments
At The Money Options

Introduction This term along with the terms In-the-Money and Out-of-the-Money are used to describe the relationship between an option’s strike price and the price of its underlying security.  It is important for the option trader to understand these terms in order to assess the potential risks and rewards of any particular option. When is a […]

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In The Money Options

| February 28, 2012 | 0 Comments
In The Money Options

This term along with the terms Out-of-the-Money and At-the-Money are used to describe the relationship between an option’s strike price and the price of its underlying security.  It is important for the option trader to understand these terms in order to assess the potential risks and rewards of any particular option. When is a call […]

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Out Of The Money Options

| February 28, 2012 | 0 Comments

This term along with the terms In-the-Money and At-the-Money are used to describe the relationship between an option’s strike price and the price of its underlying security.  It is important for the option trader to understand these terms in order to assess the potential risks and rewards of any particular option. When is a call […]

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What Are Options?

| February 28, 2012 | 0 Comments
What Are Options?

An option is a binding financial contract offering strictly defined terms and conditions.  Options contracts give the buyer of the option the right to buy or sell an underlying asset.  The basic terms of the option state the specific price of the underlying asset at which the contract may be executed.  In addition, the option […]

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Stock Option Pricing

| December 29, 2011 | 0 Comments
Stock Option Pricing

For most investors, understanding stock option pricing can be elusive and intimidating.  While it may seem like there are many variables that go into stock option pricing, the reality is there are two parts that make up the value.  Moreover, there are three distinct variables affecting an option’s price. Before we get too far along, […]

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Online Stock Options Trading

| December 29, 2011 | 0 Comments
Online Stock Options Trading

There’s no question about it… the financial world has been simplified by the integration of electronic trading.  And one of the newest innovations is the ability to trade stock options online.  It’s something that has revolutionized the options trading world. Here’s why… Long before computer trading became the norm, stock options were left to the […]

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Volatility Smile

| December 8, 2011 | 0 Comments
Volatility Smile

Volatility smile is a fairly advanced options concept.  And while advanced, it’s not overly complicated… The volatility smile is an observed pattern in which at-the-money (ATM) options tend to have lower implied volatilities than in- or out-of-the-money (OTM) options.  In essence, a volatility smile is a form of the options pricing concept volatility skew. The […]

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Volatility Skew

| December 8, 2011 | 0 Comments
Volatility Skew

Volatility Skew is a complex options pricing concept.  I’m going to explain what volatility skew means, so you can understand why certain options end up priced the way they are. Here’s the deal… Volatility skew explains why deep out of the money (OTM) option will tend to have higher implied volatility than an at the […]

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Stock Options

| December 8, 2011 | 1 Comment
Stock Options

A stock option is simply the right to buy or sell a specific stock at a certain price for a limited period of time. The stock in question is known as the underlying security.  To explain stock options properly, we need some more information… There are two basic types of stock options… a call option, […]

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Options

| December 8, 2011 | 0 Comments
Options

Options trading can be a used for many purposes.  Most of which you’ll find here.  But remember, they’re literally books filled with different options strategies. So, before you go out into the world and start trading options, we need to start with some basics. Let’s take a quick look… A stock option contract is an […]

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Options Strike Price

| December 8, 2011 | 0 Comments
Options Strike Price

An options strike price is a relatively simple term. The strike price is the price which your underlying equity is sold or bought per the terms of your options contract. For instance… you buy 1 Microsoft April $25 strike call option. You now have the right (option) to exercise you option and buy 100 shares […]

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Options Expiration

| December 8, 2011 | 0 Comments
Options Expiration

An option expiration is the date which the contract comes due.  It’s the date where an options becomes worthless, unless exercised and the buyer no longer has to rights specified in the contract. When is options expiration… Although certain expirations have changed over the past few years, the normal equity option expiration date occurs on […]

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Volume and Open Interest

| December 6, 2011 | 0 Comments
Volume and Open Interest

Introduction The liquidity of an option is an extremely important factor to consider when trading options.  Unfortunately, many option traders do not understand how to properly gauge the liquidity of an option or how to assess its impact on the price of an option.  The liquidity of a stock is simply measured by the daily […]

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Types of Options Orders

| December 6, 2011 | 0 Comments
Types of Options Orders

Before you begin placing orders through your broker to trade options, you need to first understand the various types of orders that are available to you. You can be absolutely right about the overall market trend, your chosen option strategy, the direction of the underlying security, and the pricing of the option, but if you […]

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Stocks Riskier Than Options Trading?

| December 6, 2011 | 0 Comments
Stocks Riskier Than Options Trading?

Trading Stocks Can Be Riskier Than Trading Options There are many significant risks unique to holders and writers of options. For example, an option holder can lose their entire investment in an option if they allow it to expire worthless. The writer of naked call options risks potentially unlimited losses should the price of the […]

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Options Trading Risks

| November 22, 2011 | 0 Comments
Options Trading Risks

Option holders and writers are exposed to specific risks that are unique to options. These risks are set forth in the official disclosure document published by The Options Clearing Corporation, “Characteristics And Risks Of Standardized Options“. Before your broker will allow you to buy or sell an option listed on the U.S. options market, you […]

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