Directional and non-directional option trades
Maybe you have already heard about an option trade being directional or non-directional. What does it mean? In short, this distinction is about how much the trade is exposed to movement in price of the underlying security. This article explains directional trades. Here you can find the second part concerning non-directional [...]
There is no perfect moving average
Like there is no “right” way to do many things in finance and trading, there is also no “right” moving average period.
Advantages of faster moving averages
Most people who like trading are naturally attracted to tools that seem to work faster and show more action. That’s why we tend to play [...]
What volatility means
Volatility is a measure of how much something tends to change. Unlike the usual way people look at prices of securities and their changes – up or down, the volatility point of view does not care about the direction so much. In fact it does not distinguish between up and down.
When you hear [...]
Trend is your friend, so they say
If you have looked for some trading advice in books or on the internet, you have probably come across the phrase “Trend is your friend”. This is one of the most widely accepted (and most widely reproduced) pieces of trading wisdom. Its core idea is that (in the long [...]
How to create a long straddle
A straddle is the simplest non-directional trade you can make with options. A straddle is a combination of a call and a put option with the same underlying asset, same expiration date, and most importantly, same strike price. In short, all the basic characteristics of both options you buy are [...]
Variance and standard deviation definition and calculation
Variance and standard deviation are widely used measures of dispersion of data or, in finance and investing, measures of volatility of asset prices.
Variance is defined and calculated as the average squared deviation from the mean. Standard deviation is calculated as the square root of variance or in full definition, [...]
This article is a step-by-step guide to calculating variance and standard deviation.
Definition of variance
Variance is a measure of dispersion in a set of data. It measures how big the differences are between individual numbers in a set of numbers.
Mathematically it is the average squared difference between each occurrence (each number) and the mean of the [...]
Terminology of option positions may be confusing
Sometimes people have a long put position (they own puts) and they say they are short. They mean their exposure to the underlying stock’s price movement is similar to a short position in the stock (they expect to make a profit when the stock falls).
But in fact the security [...]
Time value of at the money vs. in the money options
In the last two articles we have explained why time value of at the money options is higher than time value of in the money options (it can be explained by the factors of risk and interest). We have not talked about out of the [...]
Call options
In the previous article we have explained why time value of at the money call options is higher than time value of deep in the money call options (other factors being equal). The reason is that the closer to at the money an option is, the more it limits your maximum risk from holding [...]
