March 7, 2024 • 33 mins
In this latest, two-part episode, OIC instructor Roma Colwell joins show host, Mark Benzaquen to discuss the Greeks and their potential impact to trading options. And Dave Stuber from OCC’s Market Operations team drops in to discuss the process of listing new options on U.S. exchanges and how OCC systems maintain almost 1.5 million different options series each day. Tune in for this insightful and lively session that’s sure to appeal to investors of all levels.
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Now here's your host, Mark Benzoquin.
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Hello everyone and welcome to another episode of OIC's Wide World of Options.
I'm your host, Mark Benzoquin, and for today's episode we're going to take the next step
in our discussions on pricing by taking a look at the Greeks, which are theoretical
values that help us determine how an options price might change when one or more pricing
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inputs might change, such as stock price or implied volatility for example.
And as my colleague and fellow OIC instructor, Roma Colwell, will be presenting on this very
topic this month, who better is there to lead the discussion?
So Roma, thanks for taking the time to join me today and welcome back to the podcast.
Thank you and happy to be here.
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Excellent, Roma.
So let's go ahead and start at the beginning and when it comes to Greeks, for someone new
to options, how would you explain what Greeks are and what they might mean to investors?
Yeah, well let's start with the model, right?
The Black and Scholes or the Cox-Rubinstein model, which really takes all of the inputs,
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which are the expiration date, the underlying, we have dividends, all of those components
go into the model.
Stock price, strike price.
Right, and then there's an output that comes out with it, which is the value of that option.
So really what you're looking at is one, what that value is and two, what happens to that
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value if any of those components change.
Okay, so let's say we put all those inputs into a pricing model, it spits out an options
value of say $3 based on those inputs and then now we're trying to gauge if one of those
inputs change, what happens to that $3 price?
Right.
So the other side of that is what happens if now it's a $3.50 price.
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Which one of those components changed?
Oh, so back testing or back solving.
Right, and typically that's how you kind of move into the volatility, what price is volatility
is you'll use the current price and back into that.
Okay, and then so how do the Greeks fit into play?
Well the interesting thing about the Greeks is there's multiple ways you can use them
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and we'll just start with the delta, right?
Which is basically the equivalent of one, how much, what that value is compared to the
underlying.
For example, it's typical that the at the monies are a 50 delta.
And you can look at that in a couple of ways.
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You can say for every dollar move that particular option is going to move 50 cents.
Okay, that would be expected to move 50 cents for every dollar in the underlying.
Right, exactly.
So you can look at it that way or you can look at it, which a lot of retail investors
do as a probability of it being in the money at expiration.
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So if I'm looking at an at the money, 50 delta call, that just tells me that I have a 50%
chance of that option being in the money.
The other thing to consider is calls and puts have a relationship.
So if that call has a 50 delta, then that put has a 50 delta, right?
So you have a 50 chance of the call being in the money, meaning the stock going up,
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or you have a 50% chance of the stock going down and that put being in the money.
Okay.
So that is one way to use it.
And I think that more importantly is when you're looking at out of the monies.
So if you're looking at an out of the money option, typically those are going to be less
than 50 delta.
Right.
Right?
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So if you're buying an option that's $10 out of the money, you can look at that delta,
which might be 20, and you know that it has a 20% chance of being in the money, or conversely,
an 80% chance of being out of the money.
Right.
And when we talk about in and out of the money, we're talking about two things.
Remember when we're talking about at expiration, and we're also talking about the, when we
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talk about in the money, for example, there's a difference between being in the money and
being profitable.
So if you pay, you know, for example, $2 for an option, and it finishes in the money by
20 cents, that contract's going to be worth theoretically 20 cents, even though you paid
$2.
So even though it finished in the money, you've still lost on the contract.
But I like your idea of using delta as probability of that contract finishing in the money, because
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it does give investors a way when you're talking about out of the money, for example, that
do I really want to spend money on this contract if it's only got a 20% chance, because it's
got a 20 delta, of doing what I want it to do, of finishing in the money at expiration.
So those are, I know that those are two primary definitions of delta, and delta is typically
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the most looked at, I guess, or one of the most looked at of the Greeks.
Another popular Greek that I think is fairly easy to understand and is utilized greatly
by investors is theta, right?
Tell us about theta.
Well, theta is the rate that the option is going to decrease in price.
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So if you buy an option, like any kind of contract, like we're looking at insurance,
if you buy an insurance policy a year out, and then six months later, you want to get
out of that insurance policy, you only have six months left.
And so that insurance policy is not going to be valued at the same price.
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And it's the same with options.
So options all are decaying products, that theta tells you the rate of that decay.
So if I'm looking at an option that's going to expire in six months, and the theta is
you know, 20, then it's going to decrease by 20 cents to the next day.
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So that's where it's super important in both ways, whether you're long it, or whether you're
short it.
You know, if you're short it, that's just money in the bag, right?
Right, it's working in your favor.
Right, and then if you're long it, just know that between now and expiration, there's a
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good chance if nothing happens, that that theta is going to tell you how much that option
decayed by.
Right, yeah.
I always like to kind of look at it that when you're buying an option, you need for something
to happen.
You need for the market to go up or down.
You need for implied volatility to change, for example, but you need something to happen
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in order to basically recoup the premium that you paid for that contract.
When you're selling options, you want the opposite to happen.
You know, ideally the stock doesn't move, or you know, things, you know, go in your
favor, something like that.
But when you're paying, you're buying time, right, for whatever your forecast is to come
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true.
As that time frame shrinks, as we approach expiration, now you've got less time for whatever
you need to happen to actually occur.
So therefore, because that time frame is narrowing and shrinking, the value of that contract
is shrinking as well.
And that's the time decay, that's the price erosion that you're talking about from day
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to day.
There's less time for good things to happen, so therefore that contract is worth less, and
that's represented by theta.
Absolutely.
That's excellent.
And that's the one that, you know, those two primarily for me, delta, the expected rate
of change for a contract based on a $1 move in the underlying, that's fairly straightforward
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for investors to understand.
Time decay, you know, the value of that contract is going to erode a little bit each day.
That's fairly straightforward, I think, for investors to understand.
The thing that I think people have a hard time wrapping their head around with, the
pricing input of implied volatility, and that goes hand in hand with the Greek vega.
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So why don't you tell us about that, if you would?
Well, that implied volatility number is, you know, basically the price in some ways that
you're paying.
Now, if you're a market maker, market makers only trade volatility, right?
They're not particularly concerned about the exact price of an option, but what they're
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concerned about is what is the volatility number.
So if you were to ask a market maker where they bought something, they would say, "I
bought it at a 20 vol."
At a 20 volatility, right?
Not that I paid $2 for it, I bought it at a 20 vol.
They probably couldn't even tell you what the exact price is, but they could tell you
what the volatility is.
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And as a retail investor, the importance of knowing what volatility is, is to know whether
or not historically, if you're buying cheap or expensive volatility, because that volatility
is what is going to make that particular option, you know, more expensive.
So if there's more, think about this, if there's more volatility in the marketplace, there's
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more risk.
Volatility is a component of that risk.
So if the risk in the marketplace is, you know, astronomical, guess what?
The prices of that premium are also going to be astronomical.
And if there's not a whole lot going on, not a lot of volatility, there's, you know, there's,
everything is pretty smooth, then the price of those options are going to reflect that
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quieter marketplace.
So as a retail investor, I always like to know what price, what volatility am I buying
it only so that I know whether or not I'm buying an expensive volatility or cheaper
volatility.
The flip side of that, usually if I'm buying expensive volatility, it tells me there's
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potential in the marketplace, right?
That there's going, there's a movement there that could potentially be profitable.
Right.
And when we're talking expensive versus cheap, again, we're not talking the price of the
option, we're talking volatility relative to what, where it's been before, correct?
Okay.
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So a 90 vol, for example, could be cheap or expensive depending on where that volatility
level has been in the past.
Right.
Okay.
Excellent.
Thank you.
Now, the other two Greeks, we've got gamma, which relates to delta.
That's how much your delta is going to change with the $1 move in the underlying.
And then we've got roe.
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It's another Greek that you're going to be talking about, which is interest rates.
And typically only relevant necessarily when either in a high interest rate environment
or if we're talking a long timeframe option, right?
You know, a year and I shouldn't put a qualifier on that, but an option that, you know, maybe
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lasts a little bit longer than a short-term contract, let's say, to cover the base there.
And those are topics that you're going to be talking about in your two upcoming March
webinars.
I know the first one is going to be delta, gamma, and theta, I believe.
And then the second one is going to be vega and roe.
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So you're going to be covering all five of these major Greeks with your upcoming March
webinar.
I definitely encourage you to go to our website, www.optionseducation.org to register for Roma's
two upcoming March webinars, which I know are going to be terrific.
Roma, let's shift gears for a second and get away from talking about the webinar.
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Let's talk about you.
When I had our colleague Ken on last month, we talked about getting started in the business,
first impressions of the trading floor, for example.
Tell me about how that was for you.
So picture this, you walk onto the trading floor for the first time, what do you see,
what do you smell, what do you hear, what are your thoughts?
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Yeah, that's such a good question.
I remember when I first walked on the floor thinking to myself, what have I gotten myself
into?
Well, and you were probably, what, one of a handful of, you know, female market makers.
Right.
And in the Pacific Stock Exchange and having just graduated from college, I have a math
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degree.
So I thought, you know, wow, they're trading math all day long.
So let's, I'm going to go look into this.
I'm not taking advantage of these boys.
You know, so I get on that floor and literally there's 500 people and there's, like you said,
maybe a dozen women on the floor.
So that was my first impression, like, oh, and my second impression of course is all
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the yelling and screaming.
Now that component of it, I was like, whoa, this is freaking cool.
I love this.
This is going to be really neat.
And then my first job was a quote operator where they stuck me in a pit and in that pit
there's 30 guys, there's no women in there, it's just me.
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And my whole job is to enter in the bid and the offer.
And the only way you can determine what that bid and offer is, is to listen to them screaming
at you all day long.
And I just remember every day my dad and I would commute into work and I would say to
my dad, I think today's the day I'm getting fired because it was like a really difficult
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job.
And I'll give you my next impression.
So at the time when I started, there were no big groups.
Everybody was a sole prop.
And so they're just responsible for themselves, which means they don't care about anybody
else.
Right, every man for themselves.
Right.
So they all wore trading jackets and most of them probably had not washed them in three
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years.
If ever.
If ever, right.
And hygiene wasn't that important to them.
So for all of you that have been an athlete, right, you know what your sweat smells like.
It smells like.
It's reasonable.
But if you have perspiration from being nervous, it's a whole other level.
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So I remember being in these pits and just the smell alone.
And you're just like, how do I tell them to take a shower?
Right.
Well, and not only so you're starting in San Francisco, the markets there open at 6 30
in the morning.
Oh, yes.
I know when I was working out there, I was in the office at 4 a.m.
So yeah, maybe getting up that early, taking a shower isn't necessarily your biggest priority
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in the day.
So I get that.
And I really appreciate those stories because I can definitely identify with that.
So Roma, thank you so much for sharing your information, sharing your anecdotes.
And for listeners, I can't encourage you enough.
Please go to our website, optionseducation.org.
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Register for Roma's two upcoming March webinars.
She's going to be covering the Greeks in much greater detail than we had time for today.
So make sure you register for those.
And Roma, thank you so much for joining us today.
I really enjoyed this.
Yeah.
Well, thank you for having me, Mark.
Oh, thank you.
And now I want to transition to a different topic that we get asked often here at the
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investor education desk, which is namely the processes, the criteria, the behind the scenes
mechanics when it comes to listing options.
And to do that, I want to welcome Dave Stuber, director of OCC's market operations team.
Dave, welcome to the show.
Thanks for having me, Mark.
So Dave, tell me you are the director of market operations.
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What does that mean?
What is OCC market operations?
What are their responsibilities?
What's the role that your team plays?
What does market ops do?
Yeah.
Let me try and be concise.
We do cover a lot of ground.
But let me give you an insight into an average week.
We actually monitor for trade activity.
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So trading starts on Sunday afternoon and goes overnight and wraps up, let's see, Friday
at about three.
So my market ops is responsible for making sure that the plumbing is in place, making
sure trades are clearing, making sure that anything that pens or rejects basically due
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to incorrect trade message, validation failure, something like that.
Sometimes these trades reject, we reach out to the exchanges and make sure that it gets
corrected and sent back to us with valid information.
We're also in charge of product setup.
So that would be brand new products, vanilla equity options.
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If they get set up every day, we're responsible for that activity.
And then we balance with the exchanges every day.
We make sure that nothing's missing.
We can't move on with our finalization processing until we make sure that every trade is received
from the exchanges.
So we balance with the exchanges.
And then that kind of leads into our second and third shift processing, which is what
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we call our critical path.
And that basically means that we're kicking off end of day jobs, preparing to roll to
the next business date.
And then figuring out margin amounts, margin requirements for clearing members, which leads
eventually to margin numbers and eventually to the settlement amounts that we need to
collect from each clearing member on each day.
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So I know that's a lot right there.
So I'll pause and move on to the next.
Yeah, that is a lot.
And I like the plumbing reference that you used.
So really, you guys make sure that everything gets to be where it needs to go.
You guys manage any new product that comes on and make sure that everything is available
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for traders.
When there's a new product that is being listed, you guys make sure that traders have access
to that, come market open.
And then you guys manage all of the various option series that are out there.
Speaking of which, off the top of your head, any idea how many securities are available
to how many securities list options and how many open series there are on those listings?
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I can give you some ballpark numbers.
It's probably about 5,500 equity or ETF options listed at any given point in time.
And we've really seen this ramp up over the last couple of years.
I think just four or five years ago, there were probably about 4,000 option products.
And so we've seen a pretty big increase.
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And it also expands the total number of series that are out there considerably.
You add 1,500 new option products with fairly wide strike ranges.
And you'll see a pretty big increase in overall option series.
And I think that number is at about 1.5 million.
And that's in one call being counted and one put being counted would be a tally of two.
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So that's up to about 1.5 million out there.
And I don't think we see that decreasing any time in the near future.
Yeah, no, I would agree with that.
So let me ask you, with managing all of those series and managing all the listings, et cetera,
OCC isn't actually the entity that decides to list options, right?
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We're not the ones that decide that XYZ Corporation is going to have options listed.
We're not the ones that decide which series, which expiration dates to offer, which strikes
to offer, et cetera.
That's on the exchange level, correct?
That is accurate.
Yeah, we do have some monitoring in place and we do oversee the operation.
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But in general, these are exchanges who come to OCC and request certification to list,
you know, whether it's a new IPO or just, you know, a company that's, you know, gotten
popular, the equity volume has gotten popular.
The exchanges have fairly robust review processes and listing departments.
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And they're scanning for a couple of things, really.
They first want to see that a company is traded on a national exchange.
That's a requirement.
The next step is it has to have a price that meets a requirement and a price history is
helpful as well.
So it needs to be over $3 in general to initiate listing.
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And then there's a couple other requirements that, you know, there are less, you know,
I think investors are less familiar with.
There has to be a total of 2,000 different shareholders and I think a float of about
7 million shares out there.
So those are all requirements that the exchanges are reviewing.
And before they come to OCC requesting certification, it has to meet those requirements.
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And what the exchanges do is they submit those certification requests to OCC.
It comes in a window in our platform and we review it for basic information like QSIP
and Symbol and make sure that it's accurate.
We also make a couple other checks because we want to make sure it's a national exchange
that it's listed on.
And then we create the option product.
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Now the exchanges, they police each other as well.
Dave, good information there.
Thank you.
What about, you had mentioned that you're also in charge of new products.
What do you mean by a new product?
Would that be just a new, like a new ETF or something different?
Yeah, one point of clarification is we set these products up.
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So we control all the attributes that eventually will become this product.
We have another group that actually does the kind of the vetting process.
And what they do is they work with the exchanges to kind of fit their product into OCC systems.
And what that means is we need to kind of kick the tires a little bit and see what this
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product is all about, whether it has any new processing components.
Is there anything unique about it that where OCC might have to adapt our systems to clear
and settle that product?
So it's called our participant solutions group.
They circulate the information regarding the product and they check with our risk groups,
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our quantitative risk groups, our market operations group, our membership group.
They kind of survey the landscape and check with all the stakeholders and make sure that
there's no processing changes that would need to exist in order for us to clear that product.
And then when we get a final set of kind of product specs that get set up in advance and
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we make sure that clearing members are aware of the product and can participate in external
testing if needed.
Okay, excellent.
Thank you.
Let's, you know, great information, David.
I really appreciate that.
Thank you so much.
Let's get a little bit more personal now, if you don't mind.
I know that you've been at OCC for a number of years.
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Myself, I've been here a little bit over eight.
I think you predate me by a number of years as well.
What's your background?
How did you get started in the business?
I remember that you were a market maker on the trading floor.
Why don't you tell us a little bit about that?
Yeah, sure.
So I started at the Board of Trade in the grain room and I was collecting market data
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there.
It was about the time that the dot-com craze was blowing up and they were drawing a lot
of people over to the SIBO in order to learn how to trade options and I was one of those.
And I, you know, worked in a designated primary market for a while, which was, you know, executing
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stock orders for people trading and then eventually started trading and kind of saw a kind of
considerable evolution within the industry.
I think I saw, you know, I think one of the first big changes was moving from single listed
products where you would only see maybe a name trade on one exchange to now it trades
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on 17 different exchanges.
Another big change was the move from fractions to decimals, of course, which was, which was
gigantic because, you know, we, because we were all well versed in, you know, adding
and subtracting fractions.
And so the change to decimals was fairly interesting.
And eventually we moved to pennies and that made it a real struggle to find some edge
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on both sides, but provided, you know, great entry points for the, for the customers, you
know, no longer having to cross wide bid-ask spreads in order to answer a position.
So, and then, you know, there was also a lot of, you know, really memorable events being
on a trading floor.
You know, I was, I think I, you know, had positions during, and I was on the floor for
(28:20):
9/11, which was, you know, very memorable and, and, and very chaotic trading.
And then I think I mentioned that the dot com craze blowing up that, you know, it was,
it was very exciting trading.
And then I think finally the, the, the banking industry bubble that blew up in 2008 was,
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it was a top trading times and I think liquidity dried up quite a bit, but it was a very interesting
time to be on the floor of the exchange.
Yeah, definitely.
And I think I got started right around the same time you did 97.
I was out on the peak coast for a bit when that multi listing came up.
And in my mind, the reason being is the, the San Francisco exchange or the Pacific coast
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exchange, I should say, had a lot of those dot com listings and all of the other exchanges
at the time, it was the NASDAQ, the NYSC and the SIBO.
Obviously they wanted a piece of that pie as well.
So yeah, that was a very interesting time.
I very much remember decimalization.
I had just gotten 16th, you know, memorized teenies as we called them.
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And then now all of a sudden we went to decimals and you know, I felt that I had wasted some
time with that, but yeah, a lot of changes, you know, since you and I have been in the
business, how did you transition from the floor to OCC?
What what brought that about?
Yeah, I traded off the floor for a couple of years and realized that it was, you know,
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it was harder and harder to make, to make edge, I would say, or theoretical edge on
trades.
And you became more of a position trader, which, you know, I had was I had less experience
with.
And so I, I moved over to the OCC.
I started in the investor services area, which was very rewarding.
I'm working with individual investors on, you know, without obviously without providing
(30:19):
any trading advice, kind of giving them exposure to the potential risk rewards of certain strategies.
And so I had a lot of fun doing that.
And it was kind of well suited for me because I'd just been on the trading floor.
So I was also, you know, explaining how corporate actions work, how they impact the options.
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So that, that was my first entry into OCC.
And I worked in our membership group for quite a few years.
And that was, you know, working with other industry professionals, kind of back office
processing kind of people doing the exact same work we did at OCC, but a different clearing
numbers.
And so that was fun and built a lot of great relationships in the industry.
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And then I moved over to our market operations group.
And I've been there for about seven or eight years.
And similar, you know, we work really closely with the exchanges.
It's a great group of people.
And you know, I've built a lot of good relationships across the industry.
Yeah, excellent.
Dave, you know, terrific.
Yeah.
Thank you so much.
I really appreciate having you here as a guest.
Thanks for joining us.
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Sure, Mark.
It was great to be here.
Thanks.
You're very welcome.
Ladies and gentlemen, that's going to do it for our episode today.
Please visit our website, www.optionseducation.org, to sign up for Roma's webinars that she's
going to be presenting for the month of March.
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Any questions that you have, be sure to address to our investor education team at options@theocc.com.
You can also live chat with us on our website during regular trading hours.
Dave, again, thank you for joining us.
Roma, thanks for joining us as well.
And ladies and gentlemen, thanks for tuning in.
I hope everyone has a great day and we wish you good fortune trading.
(32:06):
We'll talk to you again soon.
Thank you.
You've been listening to the Options Industry Council's wide world of options.
If you have questions about anything you've heard on today's show, email options@theocc.com
or visit www.optionseducation.org and chat with OIC's investor education team.
(32:28):
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(32:49):
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(33:10):
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(33:40):
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(00:22):
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(00:52):
at theoptionsinsider.com.
This is the Options Industry Council's Wide World of Options.
Before we start today's show, listeners should know that options involve risk and are not
suitable for all investors.
(01:14):
Individuals should not enter into an options transaction until they have read and understood
the disclosure document, characteristics and risks of standardized options, available by
visiting theocc.com or by contacting your broker, any exchange on which options are traded,
or the Options Clearing Corporation at 125 South Franklin Street, No. 1200, Chicago,
(01:34):
Illinois 60606.
The Options Industry Council is an industry resource provided by the Options Clearing
Corporation, collectively OCC.
Any strategies discussed are strictly for illustrative and educational purposes only, and are not
to be construed as an endorsement or solicitation to buy or sell securities.
Commissions, fees, margins, interest and taxes have not been included in any of the examples
(01:58):
used in this show.
These costs impact the outcome of all stock and options transactions.
Consult your tax advisor about any potential consequences.
OIC was created in 1992 to educate investors and their financial advisors about the benefits
and risks of exchange traded equity options, and the Wide World of Options radio show is
(02:18):
one of several resources investors can utilize to learn more about options.
Other resources OIC offers include webinars, articles and self-guided options related coursework.
For more information, check out www.optionseducation.org.
Now here's your host, Mark Benzoquin.
(02:42):
Hello everyone and welcome to another episode of OIC's Wide World of Options.
I'm your host, Mark Benzoquin, and for today's episode we're going to take the next step
in our discussions on pricing by taking a look at the Greeks, which are theoretical
values that help us determine how an options price might change when one or more pricing
(03:03):
inputs might change, such as stock price or implied volatility for example.
And as my colleague and fellow OIC instructor, Roma Colwell, will be presenting on this very
topic this month, who better is there to lead the discussion?
So Roma, thanks for taking the time to join me today and welcome back to the podcast.
Thank you and happy to be here.
(03:23):
Excellent, Roma.
So let's go ahead and start at the beginning and when it comes to Greeks, for someone new
to options, how would you explain what Greeks are and what they might mean to investors?
Yeah, well let's start with the model, right?
The Black and Scholes or the Cox-Rubinstein model, which really takes all of the inputs,
(03:44):
which are the expiration date, the underlying, we have dividends, all of those components
go into the model.
Stock price, strike price.
Right, and then there's an output that comes out with it, which is the value of that option.
So really what you're looking at is one, what that value is and two, what happens to that
(04:11):
value if any of those components change.
Okay, so let's say we put all those inputs into a pricing model, it spits out an options
value of say $3 based on those inputs and then now we're trying to gauge if one of those
inputs change, what happens to that $3 price?
Right.
So the other side of that is what happens if now it's a $3.50 price.
(04:34):
Which one of those components changed?
Oh, so back testing or back solving.
Right, and typically that's how you kind of move into the volatility, what price is volatility
is you'll use the current price and back into that.
Okay, and then so how do the Greeks fit into play?
Well the interesting thing about the Greeks is there's multiple ways you can use them
(04:58):
and we'll just start with the delta, right?
Which is basically the equivalent of one, how much, what that value is compared to the
underlying.
For example, it's typical that the at the monies are a 50 delta.
And you can look at that in a couple of ways.
(05:21):
You can say for every dollar move that particular option is going to move 50 cents.
Okay, that would be expected to move 50 cents for every dollar in the underlying.
Right, exactly.
So you can look at it that way or you can look at it, which a lot of retail investors
do as a probability of it being in the money at expiration.
(05:43):
So if I'm looking at an at the money, 50 delta call, that just tells me that I have a 50%
chance of that option being in the money.
The other thing to consider is calls and puts have a relationship.
So if that call has a 50 delta, then that put has a 50 delta, right?
So you have a 50 chance of the call being in the money, meaning the stock going up,
(06:08):
or you have a 50% chance of the stock going down and that put being in the money.
Okay.
So that is one way to use it.
And I think that more importantly is when you're looking at out of the monies.
So if you're looking at an out of the money option, typically those are going to be less
than 50 delta.
Right.
Right?
(06:28):
So if you're buying an option that's $10 out of the money, you can look at that delta,
which might be 20, and you know that it has a 20% chance of being in the money, or conversely,
an 80% chance of being out of the money.
Right.
And when we talk about in and out of the money, we're talking about two things.
Remember when we're talking about at expiration, and we're also talking about the, when we
(06:54):
talk about in the money, for example, there's a difference between being in the money and
being profitable.
So if you pay, you know, for example, $2 for an option, and it finishes in the money by
20 cents, that contract's going to be worth theoretically 20 cents, even though you paid
$2.
So even though it finished in the money, you've still lost on the contract.
But I like your idea of using delta as probability of that contract finishing in the money, because
(07:21):
it does give investors a way when you're talking about out of the money, for example, that
do I really want to spend money on this contract if it's only got a 20% chance, because it's
got a 20 delta, of doing what I want it to do, of finishing in the money at expiration.
So those are, I know that those are two primary definitions of delta, and delta is typically
(07:45):
the most looked at, I guess, or one of the most looked at of the Greeks.
Another popular Greek that I think is fairly easy to understand and is utilized greatly
by investors is theta, right?
Tell us about theta.
Well, theta is the rate that the option is going to decrease in price.
(08:08):
So if you buy an option, like any kind of contract, like we're looking at insurance,
if you buy an insurance policy a year out, and then six months later, you want to get
out of that insurance policy, you only have six months left.
And so that insurance policy is not going to be valued at the same price.
(08:30):
And it's the same with options.
So options all are decaying products, that theta tells you the rate of that decay.
So if I'm looking at an option that's going to expire in six months, and the theta is
you know, 20, then it's going to decrease by 20 cents to the next day.
(08:53):
So that's where it's super important in both ways, whether you're long it, or whether you're
short it.
You know, if you're short it, that's just money in the bag, right?
Right, it's working in your favor.
Right, and then if you're long it, just know that between now and expiration, there's a
(09:14):
good chance if nothing happens, that that theta is going to tell you how much that option
decayed by.
Right, yeah.
I always like to kind of look at it that when you're buying an option, you need for something
to happen.
You need for the market to go up or down.
You need for implied volatility to change, for example, but you need something to happen
(09:34):
in order to basically recoup the premium that you paid for that contract.
When you're selling options, you want the opposite to happen.
You know, ideally the stock doesn't move, or you know, things, you know, go in your
favor, something like that.
But when you're paying, you're buying time, right, for whatever your forecast is to come
(09:56):
true.
As that time frame shrinks, as we approach expiration, now you've got less time for whatever
you need to happen to actually occur.
So therefore, because that time frame is narrowing and shrinking, the value of that contract
is shrinking as well.
And that's the time decay, that's the price erosion that you're talking about from day
(10:18):
to day.
There's less time for good things to happen, so therefore that contract is worth less, and
that's represented by theta.
Absolutely.
That's excellent.
And that's the one that, you know, those two primarily for me, delta, the expected rate
of change for a contract based on a $1 move in the underlying, that's fairly straightforward
(10:41):
for investors to understand.
Time decay, you know, the value of that contract is going to erode a little bit each day.
That's fairly straightforward, I think, for investors to understand.
The thing that I think people have a hard time wrapping their head around with, the
pricing input of implied volatility, and that goes hand in hand with the Greek vega.
(11:03):
So why don't you tell us about that, if you would?
Well, that implied volatility number is, you know, basically the price in some ways that
you're paying.
Now, if you're a market maker, market makers only trade volatility, right?
They're not particularly concerned about the exact price of an option, but what they're
(11:24):
concerned about is what is the volatility number.
So if you were to ask a market maker where they bought something, they would say, "I
bought it at a 20 vol."
At a 20 volatility, right?
Not that I paid $2 for it, I bought it at a 20 vol.
They probably couldn't even tell you what the exact price is, but they could tell you
what the volatility is.
(11:46):
And as a retail investor, the importance of knowing what volatility is, is to know whether
or not historically, if you're buying cheap or expensive volatility, because that volatility
is what is going to make that particular option, you know, more expensive.
So if there's more, think about this, if there's more volatility in the marketplace, there's
(12:11):
more risk.
Volatility is a component of that risk.
So if the risk in the marketplace is, you know, astronomical, guess what?
The prices of that premium are also going to be astronomical.
And if there's not a whole lot going on, not a lot of volatility, there's, you know, there's,
everything is pretty smooth, then the price of those options are going to reflect that
(12:35):
quieter marketplace.
So as a retail investor, I always like to know what price, what volatility am I buying
it only so that I know whether or not I'm buying an expensive volatility or cheaper
volatility.
The flip side of that, usually if I'm buying expensive volatility, it tells me there's
(12:57):
potential in the marketplace, right?
That there's going, there's a movement there that could potentially be profitable.
Right.
And when we're talking expensive versus cheap, again, we're not talking the price of the
option, we're talking volatility relative to what, where it's been before, correct?
Okay.
(13:18):
So a 90 vol, for example, could be cheap or expensive depending on where that volatility
level has been in the past.
Right.
Okay.
Excellent.
Thank you.
Now, the other two Greeks, we've got gamma, which relates to delta.
That's how much your delta is going to change with the $1 move in the underlying.
And then we've got roe.
(13:39):
It's another Greek that you're going to be talking about, which is interest rates.
And typically only relevant necessarily when either in a high interest rate environment
or if we're talking a long timeframe option, right?
You know, a year and I shouldn't put a qualifier on that, but an option that, you know, maybe
(14:01):
lasts a little bit longer than a short-term contract, let's say, to cover the base there.
And those are topics that you're going to be talking about in your two upcoming March
webinars.
I know the first one is going to be delta, gamma, and theta, I believe.
And then the second one is going to be vega and roe.
(14:22):
So you're going to be covering all five of these major Greeks with your upcoming March
webinar.
I definitely encourage you to go to our website, www.optionseducation.org to register for Roma's
two upcoming March webinars, which I know are going to be terrific.
Roma, let's shift gears for a second and get away from talking about the webinar.
(14:46):
Let's talk about you.
When I had our colleague Ken on last month, we talked about getting started in the business,
first impressions of the trading floor, for example.
Tell me about how that was for you.
So picture this, you walk onto the trading floor for the first time, what do you see,
what do you smell, what do you hear, what are your thoughts?
(15:07):
Yeah, that's such a good question.
I remember when I first walked on the floor thinking to myself, what have I gotten myself
into?
Well, and you were probably, what, one of a handful of, you know, female market makers.
Right.
And in the Pacific Stock Exchange and having just graduated from college, I have a math
(15:30):
degree.
So I thought, you know, wow, they're trading math all day long.
So let's, I'm going to go look into this.
I'm not taking advantage of these boys.
You know, so I get on that floor and literally there's 500 people and there's, like you said,
maybe a dozen women on the floor.
So that was my first impression, like, oh, and my second impression of course is all
(15:52):
the yelling and screaming.
Now that component of it, I was like, whoa, this is freaking cool.
I love this.
This is going to be really neat.
And then my first job was a quote operator where they stuck me in a pit and in that pit
there's 30 guys, there's no women in there, it's just me.
(16:15):
And my whole job is to enter in the bid and the offer.
And the only way you can determine what that bid and offer is, is to listen to them screaming
at you all day long.
And I just remember every day my dad and I would commute into work and I would say to
my dad, I think today's the day I'm getting fired because it was like a really difficult
(16:37):
job.
And I'll give you my next impression.
So at the time when I started, there were no big groups.
Everybody was a sole prop.
And so they're just responsible for themselves, which means they don't care about anybody
else.
Right, every man for themselves.
Right.
So they all wore trading jackets and most of them probably had not washed them in three
(17:00):
years.
If ever.
If ever, right.
And hygiene wasn't that important to them.
So for all of you that have been an athlete, right, you know what your sweat smells like.
It smells like.
It's reasonable.
But if you have perspiration from being nervous, it's a whole other level.
(17:24):
So I remember being in these pits and just the smell alone.
And you're just like, how do I tell them to take a shower?
Right.
Well, and not only so you're starting in San Francisco, the markets there open at 6 30
in the morning.
Oh, yes.
I know when I was working out there, I was in the office at 4 a.m.
So yeah, maybe getting up that early, taking a shower isn't necessarily your biggest priority
(17:48):
in the day.
So I get that.
And I really appreciate those stories because I can definitely identify with that.
So Roma, thank you so much for sharing your information, sharing your anecdotes.
And for listeners, I can't encourage you enough.
Please go to our website, optionseducation.org.
(18:10):
Register for Roma's two upcoming March webinars.
She's going to be covering the Greeks in much greater detail than we had time for today.
So make sure you register for those.
And Roma, thank you so much for joining us today.
I really enjoyed this.
Yeah.
Well, thank you for having me, Mark.
Oh, thank you.
And now I want to transition to a different topic that we get asked often here at the
(18:33):
investor education desk, which is namely the processes, the criteria, the behind the scenes
mechanics when it comes to listing options.
And to do that, I want to welcome Dave Stuber, director of OCC's market operations team.
Dave, welcome to the show.
Thanks for having me, Mark.
So Dave, tell me you are the director of market operations.
(18:56):
What does that mean?
What is OCC market operations?
What are their responsibilities?
What's the role that your team plays?
What does market ops do?
Yeah.
Let me try and be concise.
We do cover a lot of ground.
But let me give you an insight into an average week.
We actually monitor for trade activity.
(19:18):
So trading starts on Sunday afternoon and goes overnight and wraps up, let's see, Friday
at about three.
So my market ops is responsible for making sure that the plumbing is in place, making
sure trades are clearing, making sure that anything that pens or rejects basically due
(19:40):
to incorrect trade message, validation failure, something like that.
Sometimes these trades reject, we reach out to the exchanges and make sure that it gets
corrected and sent back to us with valid information.
We're also in charge of product setup.
So that would be brand new products, vanilla equity options.
(20:01):
If they get set up every day, we're responsible for that activity.
And then we balance with the exchanges every day.
We make sure that nothing's missing.
We can't move on with our finalization processing until we make sure that every trade is received
from the exchanges.
So we balance with the exchanges.
And then that kind of leads into our second and third shift processing, which is what
(20:27):
we call our critical path.
And that basically means that we're kicking off end of day jobs, preparing to roll to
the next business date.
And then figuring out margin amounts, margin requirements for clearing members, which leads
eventually to margin numbers and eventually to the settlement amounts that we need to
collect from each clearing member on each day.
(20:49):
So I know that's a lot right there.
So I'll pause and move on to the next.
Yeah, that is a lot.
And I like the plumbing reference that you used.
So really, you guys make sure that everything gets to be where it needs to go.
You guys manage any new product that comes on and make sure that everything is available
(21:11):
for traders.
When there's a new product that is being listed, you guys make sure that traders have access
to that, come market open.
And then you guys manage all of the various option series that are out there.
Speaking of which, off the top of your head, any idea how many securities are available
to how many securities list options and how many open series there are on those listings?
(21:37):
I can give you some ballpark numbers.
It's probably about 5,500 equity or ETF options listed at any given point in time.
And we've really seen this ramp up over the last couple of years.
I think just four or five years ago, there were probably about 4,000 option products.
And so we've seen a pretty big increase.
(21:59):
And it also expands the total number of series that are out there considerably.
You add 1,500 new option products with fairly wide strike ranges.
And you'll see a pretty big increase in overall option series.
And I think that number is at about 1.5 million.
And that's in one call being counted and one put being counted would be a tally of two.
(22:23):
So that's up to about 1.5 million out there.
And I don't think we see that decreasing any time in the near future.
Yeah, no, I would agree with that.
So let me ask you, with managing all of those series and managing all the listings, et cetera,
OCC isn't actually the entity that decides to list options, right?
(22:44):
We're not the ones that decide that XYZ Corporation is going to have options listed.
We're not the ones that decide which series, which expiration dates to offer, which strikes
to offer, et cetera.
That's on the exchange level, correct?
That is accurate.
Yeah, we do have some monitoring in place and we do oversee the operation.
(23:06):
But in general, these are exchanges who come to OCC and request certification to list,
you know, whether it's a new IPO or just, you know, a company that's, you know, gotten
popular, the equity volume has gotten popular.
The exchanges have fairly robust review processes and listing departments.
(23:34):
And they're scanning for a couple of things, really.
They first want to see that a company is traded on a national exchange.
That's a requirement.
The next step is it has to have a price that meets a requirement and a price history is
helpful as well.
So it needs to be over $3 in general to initiate listing.
(23:56):
And then there's a couple other requirements that, you know, there are less, you know,
I think investors are less familiar with.
There has to be a total of 2,000 different shareholders and I think a float of about
7 million shares out there.
So those are all requirements that the exchanges are reviewing.
And before they come to OCC requesting certification, it has to meet those requirements.
(24:18):
And what the exchanges do is they submit those certification requests to OCC.
It comes in a window in our platform and we review it for basic information like QSIP
and Symbol and make sure that it's accurate.
We also make a couple other checks because we want to make sure it's a national exchange
that it's listed on.
And then we create the option product.
(24:40):
Now the exchanges, they police each other as well.
Dave, good information there.
Thank you.
What about, you had mentioned that you're also in charge of new products.
What do you mean by a new product?
Would that be just a new, like a new ETF or something different?
Yeah, one point of clarification is we set these products up.
(25:03):
So we control all the attributes that eventually will become this product.
We have another group that actually does the kind of the vetting process.
And what they do is they work with the exchanges to kind of fit their product into OCC systems.
And what that means is we need to kind of kick the tires a little bit and see what this
(25:26):
product is all about, whether it has any new processing components.
Is there anything unique about it that where OCC might have to adapt our systems to clear
and settle that product?
So it's called our participant solutions group.
They circulate the information regarding the product and they check with our risk groups,
(25:50):
our quantitative risk groups, our market operations group, our membership group.
They kind of survey the landscape and check with all the stakeholders and make sure that
there's no processing changes that would need to exist in order for us to clear that product.
And then when we get a final set of kind of product specs that get set up in advance and
(26:11):
we make sure that clearing members are aware of the product and can participate in external
testing if needed.
Okay, excellent.
Thank you.
Let's, you know, great information, David.
I really appreciate that.
Thank you so much.
Let's get a little bit more personal now, if you don't mind.
I know that you've been at OCC for a number of years.
(26:33):
Myself, I've been here a little bit over eight.
I think you predate me by a number of years as well.
What's your background?
How did you get started in the business?
I remember that you were a market maker on the trading floor.
Why don't you tell us a little bit about that?
Yeah, sure.
So I started at the Board of Trade in the grain room and I was collecting market data
(26:53):
there.
It was about the time that the dot-com craze was blowing up and they were drawing a lot
of people over to the SIBO in order to learn how to trade options and I was one of those.
And I, you know, worked in a designated primary market for a while, which was, you know, executing
(27:15):
stock orders for people trading and then eventually started trading and kind of saw a kind of
considerable evolution within the industry.
I think I saw, you know, I think one of the first big changes was moving from single listed
products where you would only see maybe a name trade on one exchange to now it trades
(27:35):
on 17 different exchanges.
Another big change was the move from fractions to decimals, of course, which was, which was
gigantic because, you know, we, because we were all well versed in, you know, adding
and subtracting fractions.
And so the change to decimals was fairly interesting.
And eventually we moved to pennies and that made it a real struggle to find some edge
(27:59):
on both sides, but provided, you know, great entry points for the, for the customers, you
know, no longer having to cross wide bid-ask spreads in order to answer a position.
So, and then, you know, there was also a lot of, you know, really memorable events being
on a trading floor.
You know, I was, I think I, you know, had positions during, and I was on the floor for
(28:20):
9/11, which was, you know, very memorable and, and, and very chaotic trading.
And then I think I mentioned that the dot com craze blowing up that, you know, it was,
it was very exciting trading.
And then I think finally the, the, the banking industry bubble that blew up in 2008 was,
(28:47):
it was a top trading times and I think liquidity dried up quite a bit, but it was a very interesting
time to be on the floor of the exchange.
Yeah, definitely.
And I think I got started right around the same time you did 97.
I was out on the peak coast for a bit when that multi listing came up.
And in my mind, the reason being is the, the San Francisco exchange or the Pacific coast
(29:10):
exchange, I should say, had a lot of those dot com listings and all of the other exchanges
at the time, it was the NASDAQ, the NYSC and the SIBO.
Obviously they wanted a piece of that pie as well.
So yeah, that was a very interesting time.
I very much remember decimalization.
I had just gotten 16th, you know, memorized teenies as we called them.
(29:32):
And then now all of a sudden we went to decimals and you know, I felt that I had wasted some
time with that, but yeah, a lot of changes, you know, since you and I have been in the
business, how did you transition from the floor to OCC?
What what brought that about?
Yeah, I traded off the floor for a couple of years and realized that it was, you know,
(29:55):
it was harder and harder to make, to make edge, I would say, or theoretical edge on
trades.
And you became more of a position trader, which, you know, I had was I had less experience
with.
And so I, I moved over to the OCC.
I started in the investor services area, which was very rewarding.
I'm working with individual investors on, you know, without obviously without providing
(30:19):
any trading advice, kind of giving them exposure to the potential risk rewards of certain strategies.
And so I had a lot of fun doing that.
And it was kind of well suited for me because I'd just been on the trading floor.
So I was also, you know, explaining how corporate actions work, how they impact the options.
(30:39):
So that, that was my first entry into OCC.
And I worked in our membership group for quite a few years.
And that was, you know, working with other industry professionals, kind of back office
processing kind of people doing the exact same work we did at OCC, but a different clearing
numbers.
And so that was fun and built a lot of great relationships in the industry.
(31:02):
And then I moved over to our market operations group.
And I've been there for about seven or eight years.
And similar, you know, we work really closely with the exchanges.
It's a great group of people.
And you know, I've built a lot of good relationships across the industry.
Yeah, excellent.
Dave, you know, terrific.
Yeah.
Thank you so much.
I really appreciate having you here as a guest.
Thanks for joining us.
(31:22):
Sure, Mark.
It was great to be here.
Thanks.
You're very welcome.
Ladies and gentlemen, that's going to do it for our episode today.
Please visit our website, www.optionseducation.org, to sign up for Roma's webinars that she's
going to be presenting for the month of March.
(31:43):
Any questions that you have, be sure to address to our investor education team at options@theocc.com.
You can also live chat with us on our website during regular trading hours.
Dave, again, thank you for joining us.
Roma, thanks for joining us as well.
And ladies and gentlemen, thanks for tuning in.
I hope everyone has a great day and we wish you good fortune trading.
(32:06):
We'll talk to you again soon.
Thank you.
You've been listening to the Options Industry Council's wide world of options.
If you have questions about anything you've heard on today's show, email options@theocc.com
or visit www.optionseducation.org and chat with OIC's investor education team.
(32:28):
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(32:49):
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(33:10):
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(33:40):
at theoptionsinsider.com.
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