Trading Summary

Update June 26

US markets closed out Friday almost unchanged after a faily choppy trading session. My option spreads, however, are all making money now. MU's dissapointing earnings announcement has continued to put pressure on the stock, which sees it now trading at $19.55 - well below the $23.46 breakeven target. The MU put spread is almost at it's maximum P&L; valued at $71.30 against at $73 max. If I exit now though, I will end up paying additional brokerage - so I might just let the position ride as last trading day is this Thursday.

BTU put spread is valued at $105.50 and RAD short call spread closed the week out valued at $7.50.

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.

Peabody Energy Chart

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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Option Pricing

There's lots of programs out there that will charge you a monthly fee for a calculator that prices up option contracts. Not here!

I've put together a little something in Microsoft Excel that just does this, plus prices up all of the Option Greeks.

Option Combinations

Browse our comprehensive dictionary of option combination strategies. Learn how option combinations give you the ultimate flexibility with your investment decisions.