Update June 30
Open P&L for all 3 put spreads now at +$245. 2 days left until option expiration. I think it's worth holding onto MU and RAD until expiry. However, BTU I'm concerned about. If the stock closes above $2.50, then I will end up with a short stock position at $3 - as the $3 long put will be exercised into short stock and the $2.50 short put will expire worthless. If the stock closes below $2.50 then the short put will also be exercised by assigning me stock - cancelling out the short leg from the $3 strike. I'll see how Wednesday's session turns out.
Peabody Energy (BTU) high on implied volatility - over 100%. But earnings aren't out for a few weeks. Strong downtrend in place and huge IV for the downside puts. After getting burnt on WTW shorting puts, I've gone with the trend here with a long put spread aiming for the stock to be lower than $2.75 over the coming three weeks.
Micron Technology also a good candidate for a long put spread although I might have been too early to put this on as the stock looks like rebounding in the short term. I probably could have traded a better price if waited an extra day or so.
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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