This week Fed releases:
Monday - tbills auction, ISM data
Tuesday - import/export data, redbook,
Wednesday - MBA data, EIA data, wholesales, used car sales
Thursday - jobless claims, home sales, fed balance sheet
Friday - oil rigs data
In previous posts I talked about generating income by selling Call and Put options. Gamma is the second derivative of option price change to underlying price change, or a speed of Delta change. If you remember Delta had a humble range of 0..1.0 roughly approximating the probability of option being in the money. Delta approaches 0(out of the money) or 1(in the money) closer to the date of expiration. Gamma of around at the money options gets higher closer to the date of expiration of the options because that means that probability of option being in the money changes rapidly as expiration approaches. Similarly Gamma is higher for at-the-money options since just small changes in underlying price can make or break option value. So how do I use Gamma when selling Calls and Puts?
As the option seller I often need to decide whether to sell options with the strike price close to being at-the-money. The danger here is that options close to being at-the-money have very high Gamma and therefore they can rapidly hurt my portfolio by even minor swings in the underlying price. To mitigate this risk I can sell options with long expiration dates. So I always balance out expiration dates and current Gamma levels. Alternatively I can decide to sell options out-of-money or deep in-the-money so they have low Gamma. If you remember from my previous posts my primary approach is steady income from option selling of Covered Calls and Cash Secured Puts so eventually big swings leading to the expiration date won’t matter much specifically for my approach.. So Gamma is important but not as much for those who sell Calls and Puts without securing them or especially when using leverage.
The other important Greek for me is Theta which is a first derivative of option price to time change till expiration. This is the one that makes me happy. My portfolio Theta is overwhelmingly positive, meaning every passing day makes me money. Options I sold naturally lose value if their probability of getting executed on the day of expiration falls. Since I usually sell many options for various stocks, for various expiration days and with carefully chosen strike prices on average, the absolute majority of the options I sold will not get executed and that means their Delta falls to zero as time comes. That means their price falls to zero as time approaches the expiration date.
This week Fed releases:
Monday - CFTC data, tbill auction
Tuesday - PMI, redbook, M2 money supply,
Wednesday - MBA housing data, EIA energy data, home sales
Thursday - PCE, personal income, jobless claims, Fed balance sheet
Friday - trade balance
This week Fed releases:
Monday - industrial production, tbill auction
Tuesday - housing starts, import and export prices, redbook
Wednesday - FED INTEREST RATE DECISION, retail sales, MBA data, home sales, business inventories
Thursday - jobless claims, fed balance sheet
Friday - CFTC data
This week Fed releases:
Monday - consumer inflation expectations, tbill auction
Tuesday - import/export, balance of trade, wholesales, existing home sales
Wednesday - CPI, EIA data, budget balance
Thursday - PPI, initial jobless claims, Fed balance sheet
Friday - CFTC data
This week Fed releases:
Monday - ISM data, tbill auction
Tuesday - redbook, JOLTS
Wednesday - factory orders, MBA, ISM, EIA
Thursday - jobless claims, Fed balance sheet
Friday - payroll data, participation rate
This week Fed releases:
Monday - holiday
Tuesday - house price index, M2 money supply,
Wednesday - redbook, MBA,
Thursday - PCE, jobless claims, personal spending, new home sales, EIA
Friday - retail inventories, CFTC
I think I got scammed by Hayden Van Der Post by buying this algorithmic trading book: https://www.amazon.com/dp/B0GHNDVGFB . I often buy lots of exotic books about stock trading and options to learn the new frontiers. This time I was not careful enough and didnt check the contents and the title was very intriguing: "Game Theory Models for Trading, Risk, and Quant Strategy: Predictive Market Behavior". So I just bought it... Little did I know that from the first pages of reading it I got a sense that human did not write the book. The new sentences were abruptly breaking the logic of the previous sentences and the thoughts the "author" tried to communicate were hard to follow... Unless I miss something seems like the 300+ page book was almost entirely written by AI... Careful out there!
This week Fed releases:
Monday - t-bill auction
Tuesday - pending home sales, redbook,
Wednesday - EIA, MBA,
Thursday - housing starts, jobless claims, Fed balance sheet
Friday - oil rig count
As I was describing the two popular ways to generate “rental” income by selling Covered Call options and Cash Secured Put options the one important aspect was left behind and that is the Greeks. When dealing with options people cannot ignore some of their properties as time flows.
One of the most important such properties is options Delta. This is nothing more than just a first order partial derivative of option price to the underlying price change, so just dP/dS, where P is option price and S is the underlying(/stock) price. The one interesting property of Delta is that it roughly corresponds to the option being in the money. Think about it, if a Call option represents a contract to buy a stock and if we are certain the contract will be executed at expiration then it means that a 1% change in the stock price would correspond to 1% change in the option price, but if for example we only think that the option will be executed with a chance of only 10% then 1% price change in stock price would roughly correspond to only 0.1% change in the option price. So Delta of 1 would roughly mean that the market thinks that the option is in the money and will be executed with almost complete certainty while Delta close to zero means the market thinks the option will almost certainly not be executed and therefore is out of the money.
So when we choose to sell a Call or a Put option it is always a good idea to pay attention to the option Delta. If it is high then it would indicate the option is quite expensive and the market assumes it is almost certainly will be executed. So selling such an option can boost the income provided the seller assumes the market is wrong and actually the option might not get executed. I personally like to sell Puts with high Delta when I actually want to increase a position in a certain stock for my overall portfolio. This way I get the income from selling the expensive Put that has high Delta and when Put gets indeed executed I buy that stock from the Put holder. So not only do I get the income from selling the Put but I also achieve the goal of increasing the stock holding of my portfolio. I like selling the calls with low Delta because usually I do not want to sell stocks so I get less income from selling Calls but I also usually are not forced to sell the Call holders my stock.
It is important to note that Delta representing probability of being in the money is only what the market believes in at any moment and not the objective reality. So of course if the stock is down on a given day this gives a boost to Put options and when the stock is up then it gives a boost to Call options on the given day. Therefore it is generally better to sell Calls when the stock is up that day and sell Puts when the stock is down on a given day. There are other important Greeks like Gamma which is the second partial derivative of option price to the underlying price change. Theta is the first partial derivative of option price to the time change. These two I use in specific cases. I will write a separate post about them. Then of course there is Vega and Rho which honestly I do not use much at this time. The reader is free to explore their applications.
This week Fed releases:
Monday - t-bill auction
Tuesday - CPI, redbook, household debt,
Wednesday - PPI, MBA data, EIA data
Thursday - export/import data, retail sales, Fed balance sheet
Friday - industrial production, capacity utilization
This week Fed releases:
Monday - factory orders,vehicle sales,t-bills auction
Tuesday - import/export data, redbook, JOLTS, ISM data
Wednesday - MBA data, EIA data
Thursday - used car prices, jobless claims, unit labor costs, fed balance sheet
Friday - non farm payrolls, wholesale sales