Update February 8th
Total Open P&L down -$40.70.
|CAT Short Call Spread||28-Jan-16||11||-49.8|
|FCX Iron Butterfly||28-Jan-16||11||-15|
Coach (COH) After being assigned the short stock position, I decided to sell an ATM put option. If the market falls, I will be exercised on the put and take delivery of 100 shares closing out my short assignment at the same price. I received $75 for the sale of the put. I still have risk on the upside if the market rallies. If this happens, I will perhaps look to sell another put with a higher strike depending on how far the market trades.
Freeport-McMoRan (FCX) down 6%. Spread showing small loss of -$15.
Caterpillar (CAT) good to see a reversal; down 2.33%. Spread made some ground but still showing a loss of $49.10.
Using the Delta to Hedge Options
Delta measures the theoretical change to the value of an option as the underlying changes. This means the option's value is tied to the underlying by the amount of "delta" the option theoretically has. Traders can then offset the risk of the opiton by trading an appropriate amount of shares in the underlying security
Pricing Options with the Binomial Model
The Binomial Model is the model of choice for American styled options - that is, those options where you can exercise any time up until the expiration date. Even though Black and Scholes was the original option pricing model, the Binomial Model is probably more widely used than B&S.
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