The vast, limitless world of derivatives is quite complicated and very complex. So join Dr. Jim and dig beneath the surface – uncover some of the more intricate ideas that this space has to offer, and then apply these abstract concepts into your trading.
Unbalanced Ratio Spreads can allow us to add more downside protection, or amplify our upside return potential.
Driven by Vanna, with a spike in volatility at tastytrade, OTM strikes will see their deltas rise and ITM strikes will see their deltas fall.
The market is structured to drift higher over time as the forces of Geometric Brownian Motion, the Capital Asset Pricing Model, and Supply and Demand show us.
Even though our mechanics have largely been built through experience and empirics, there exists some high-level, theoretical mathematics behind every move that we make.
Theta is typically thought of as a return metric, but here at tastytrade, we recognize that it has important risk characteristics too.
As stock prices have risen significantly over the years, margins have also risen. But thankfully, the efficiency has remained intact, as premiums have risen, too.
The only way to use probabilities in a continuous space is to shift your focus from points on the curve to areas under the curve. tastytrade explains.
With undefined-risk short premium, our theta is always positive and our vega always negative, but with defined-risk short premium, that is not always the case
Now that we have a Standard Normal Variable that can be standardized into a Z-Score, we can begin to build an Expected Move at tastytrade.
Believe it or not, but we use Z-Scores every single day at tastytrade to analyze strategies and choose our strikes.
At tastytrade, the Standard Normal Variables that come from the Black-Scholes Model form the foundation for all that we do.
The classic philosophical debate of a priori versus a posteriori has a direct connection to the world of options and how we trade at tastytrade.
Not only does a more active approach to trading make it easier to adjust your positions and respond to market conditions, but the geometric return sequence could effortlessly improve.
The fact that the intercept coefficient is statistically significant indicates that there are indeed unknown factors to volatility that have yet to be discovered.
The market randomness that we all feel every day has mathematical underpinnings that range all the way from heteroskedasticity to random volatility shocks.
The propensity for markets to fall so quickly could be the speed with which market makers drop their bid prices in falling markets relative to raising their offer prices in rising markets.
Chaos Theory reminds us that we have no control over how a given trade or series of trades will perform, as the underlying systems are built on erratic behavior
While our standard adjustment protocol for a Short Strangle is to roll the untested side, a good case can be made for rolling the tested side of the strategy at times to recenter the position.
tastytrade explains that a Gamma Squeeze is an options phenomenon that is driven by the counterparty’s desire to hedge their directional exposure from taking the other side of retail order flow.
BLUE - Best Linear Unbiased Estimator - might appear to be a theoretical construct that only academics can use, but today we see that tastytrade’s own research also has a “BLUEness” to it
Not only can Put-Call Parity help us build synthetic stock positions at tastytrade, but it can also help explain extrinsic value differences between Calls and Puts.
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