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Buzz and Banter


I am not an expert on retail software for option trading (we built our own), but probably the best book for understanding options is the time tested "Options as a Strategic Investment" written by my old friend Larry McMillan. Once you get through it, you will be as dry as the both of us.

As far as the question posed by Scott Reamer on which option to buy if big moves are expected, let's talk gamma. Gamma is the change in the delta of the option and can be viewed somewhat like leverage: high gamma essentially equates to high leverage. When you buy an option you want the best bang for the buck, which means you want the highest gamma (bang) for the smallest theta (buck) or time decay. The gamma of an option is highest when the stock is at the money, so it would seem that this would be the option to buy. The problem is that is also where the greatest decay occurs. In addition, gamma is not static: an out of the money call initially has a lower gamma, but then a higher one when it becomes at the money. So I go back to my original premise: if large moves are expected in a short time, buy more out of the money options. A further thought is that gamma is greater the cheaper the option, so don't forget to watch what price you pay. In options, price is everything
No positions in stocks mentioned.

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