Option Greeks Implied Volatility

Webinar Presentation How Volatility & Other Important Factors Affect the

Greeks

Presented by Trading Strategy Desk

– Options trading entails significant risk and is not appropriate for all investors. Prior to trading options, you must receive a copy of Characteristics and Risks of Standardized Option, which is available from Fidelity Investments, and be approved for options trading. Supporting documentation for any claims, if applicable, will be furnished upon request.

– Greeks are mathematical calculations used to determine the effect of various factors on options.

– The information in this presentation, including examples using actual securities and price data, is strictly for illustrative and educational purposes only and should not to be construed as an endorsement or recommendation.

– Examples in this presentation do not include transaction costs (commissions, margin interest, fees) or tax implications, but they should be considered prior to entering into any transactions.

2 Purpose and objectives

The goal of this webinar is to make traders more aware of how volatility can help or hurt their strategies

• What we will cover: – Review of the Option Greeks and Implied Volatility (IV) – Impacts of an increase or decrease in IV on • Delta • Gamma • Theta • Vega – What does it all mean to you as a trader? – Introduction to Fidelity option analytics tools

3 Review: Option Greeks & Volatility Option Greeks

Delta Measures option's price sensitivity to $1 move in the underlying security Exposure Gamma Measures change in Delta with $1 move in the underlying security Speed

Theta Measures option's price sensitivity to each passing day towards expiration Time Vega Measures option's price sensitivity to 1% change in IV Volatility Implied Volatility (IV) • Market’s expectation of movement in the underlying security • Measure of how expensive/inexpensive an option contract is

What causes IV to increase or decrease?

4 Implied Volatility (IV)

IV is determined by supply and demand of option contracts

Puts and calls are Large expected Increased demand bought to price move makes options more Higher IV speculate and expensive hedge

Puts and calls are Increased supply Minimal expected Lower IV price move sold to generate makes options less income expensive

5 Implied Volatility (IV)

High Implied Volatility

Normal Implied Volatility

Low Implied Volatility

6 Extrinsic Value Option Greeks only affect extrinsic value

Aug 65 ITM Call

Aug 75 ATM Call

Aug 85 OTM Call

7 Example Implied Volatility (IV)

• IV Index chart shows a significant drop in IV

• Key Statistics shows us that current IV levels are at 0 percentile of its 52 week range

Discussion on how an increase or decrease in IV will affect the Greeks

8 Impact on Delta

ITM Deltas decrease ATM Deltas stay approximately OTM Deltas increase (95 to 87) the same (53) (6 to 16)

9 Impact on Delta

What does it mean to you?

ITM ATM OTM Deltas contracts contracts contracts Increasing IV Decrease Unchanged Increase Decreasing IV Increase Unchanged Decrease

10 Impact on Gamma

(Deep) ITM Gamma ATM Gamma (and Near-the- (Deep) OTM Gamma increases money contracts) decreases increases (1.441 to 1.992) (7.12 to 4.747) (2.172 to 2.814)

11 Impact on Gamma

What does it mean to you?

ITM ATM OTM Gamma contracts contracts contracts Increasing IV Increase Decrease Increase Decreasing IV Decrease Increase Decrease

12 Impact on Theta

ITM Theta increases ATM Theta increases OTM Theta increases (1.574 to 4.217) (5.008 to 7.495) (1.77 to 5.01)

13 Impact on Theta

What does it mean to you?

ITM ATM OTM Theta contracts contracts contracts Increasing IV Increase Increase Increase Decreasing IV Decrease Decrease Decrease

14 Impact on Vega

ITM Vega increases ATM Vega stays approximately OTM Vega increases (2.158 to 4.18) the same (2.392 to 4.658) (7.36)

15 Impact on Vega

What does that mean to you?

ITM ATM OTM Vega contracts contracts contracts Increasing IV Increase Unchanged Increase Decreasing IV Decrease Unchanged Decrease

16 It’s All Greek to Me

Resources used in this presentation: • Active Trader Pro option analytic tools – Key Statistics (provided by Livevol, Inc.) – Profit/Loss calculator (provided by IVolatility.com) • Option chain • IV Index Additional Resources: • Fidelity.com Learning Center • Option Greeks Video (Fidelity Learning Center) • Probability Calculator (provided by Convergex)

17 It’s All Greek to Me

This concludes today’s presentation. Thank you for attending!

To Register, please visit the Fidelity.com Learning Center https://www.fidelity.com/learning-center

For additional support, please contact a Fidelity representative at (877) 907-4429.