OPTIONS
Confused? Find Out More
Beware The Greeks
by Ron Ianieri
Confused about option greeks? Find out what each means and
how they affect price movement.
IN recent months, individual investors have
been flocking to the option market in record numbers and with good reason.
When used properly, options give the investor many advantages over simply
using the underlying instruments such as stocks. The mad rush into the
option market is likely to continue as the popularity of options grows
and expands.
Several recent news announcements have helped investors realize the
truth about options. The first big news is that the NASDAQ is going to
list options! That's right, the powerful NASDAQ is going into the option
market because it recognizes the investment legitimacy and future of options.
On top of that, the NASDAQ petitioned the SEC to allow options to trade
in pennies. This makes options more economically attractive to investors.
Finally, the SEC is starting to lighten up the margin requirements for
option positions, making options even more cost-efficient.
At this point you are probably thinking that options sound too good
to be true. However, options do have a drawback. Options are a more sophisticated
product than their underlying instruments. Being more sophisticated, they
have many more topics and concepts that must be mastered in order to use
their power properly. With options, as with any other highly technical
vehicle, a solid foundation is the key to understanding.
THE BASICS
One of the foundational concepts of options is the "greeks." There seems
to be confusion about how greeks should be approached and taught, if at
all. Many option instructors consider the greeks to be an advanced topic,
so they schedule it last. Some instructors consider the greeks to be unimportant
and not only don't teach them, but tell their students to ignore them as
useless concepts. We see the greeks as a necessary concept that should
be stressed and taught first, even before option strategies.
...Continued in the May issue of Technical Analysis of STOCKS &
COMMODITIES
Excerpted from an article originally published in the May 2008 issue
of Technical Analysis of
STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2008, Technical Analysis, Inc.
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