Meat and Potatoes of Options

With Licia Leslie [frep, frep header, header, logo] Andrew Giovinazzi believes that he's pinpointed 10 companies that will be the best performing in 2025. He sees the traces that Institutions leave behind when they decide to go BIG on a company LONG term ... and now he's ready to put on trades with SUBSTANTIAL upside. [All the details are here.]( Hi Traders, Today, I want to hand the mic over to head of techincal analysis at Option Pit: Licia Leslie. She has an important message on the core parts of options for everyone.  So i'll hand it over to her now. --------------------------------------------------------------- I know I have discussed the options synthetics several times now. But I don’t think I have stressed the importance of this relationship between calls, puts and stock. This is literally the meat and potatoes of options trading. As long as you have two of the three, you can price the third one. Back when I was clerking, for the first of three market makers in my career ugh, in the mid 80s not everyone knew this formula. Believe it or not, there were traders in the pits that had no idea! The guy I worked for knew and he taught me. He was able to scoop literally a dollar risk free when the options got out of whack. When I say out of whack, that means the reversal and conversion were not adding up. As long as you know this formula, you can price any option. Nowadays the computers do it all for us so we know the options are generally inline. But it is still vital to know this as it can help you better understand the nuances of options, help to build better option strategies for the conditions and get you out of the jam of pattern day trading. Let’s dig in. You absolutely have got to memorize this. Memorize it first and then it will become a natural thing you just automatically know. The Reversals and Conversions are the trinity: stock, call, and put. Conversion: you are carrying long stock so you are paying interest, this matters with longer dated positions and now that we have interest rates again. You also collect any dividends. Conversion: Long stock + Long put + Short call For simplicity this is for near term options as it takes out interest and dividends. Reversal: Short stock + Short put + Long call When you are short stock you collect the interest and pay the dividends, but we are using short term so this takes that out of the equation. So, looking at the options chain you can take each strike and add up the stock and puts, subtract the strike price and that is what the call price will be. This holds for any stock at any volatility. Let’s look at Riot Platforms (TIcker: RIOT): [ded] This screenshot is taken with the stock trading $16.45. Now you can take any strike, add the put price to $16.45, subtract the strike price and that will be the price of your call. At the strike 16.50: 16.45 (stock price) + 1.08 (mid range of put price) - 16.50 (strike price) = $1.03 (call price) 16.45 + 1.08 = 17.53 17.53 - 16.50 = 1.03 Call market is 1.01 - 1.09  Here is the 15 strike: 16.45 + .40 = 16.85 16.85 - 15 = 1.85 Call market is $1.83 - $1.91  Now the 18 strike: 16.45 + 2.10 = 18.55 18.55 - 18 = .55 Call market is .54 - .62  I took the midrange of the put market to price these. As you can see, the call markets are leaning a bit higher, meaning the call value is closer to the bid. That tells us the liquidity providers would rather be buyers of these calls. And looking at the stock chart and the implied volatility, this makes sense: [ded] The stock just rallied seven bucks in six days on a stock trading under $20. That is a massive move of over 61%. I guarantee you these market makers do not want to be short call units! Knowing these two formulas, not only helps you price the options, but you can literally create any of the three with the other two. So, you want to go long? Go short? Close a position synthetically? Know these formulas. Next time I will demonstrate the synthetics with the corresponding charts. Thanks for reading, Join Licia's trading community and start receiving her Profits In Pumps Newsletter. [Click this link to sign up!]( [licia sig] Don't miss when our traders go live! Get an alert everytime we open the live rooms to all of our readers for free by selecting the calendar you use below. Add Option Pit Live Events to Your Calendar [Apple]( [Google]( [Outlook]( [Outlook.com]( [Office 365]( [Yahoo]( All the Right Options. The Option Pit Team brings more than 150 years of experience to you every day. From the trading pits of Chicago to the world's largest banks to the halls of power in DC -- they've done it all. Now they’re collectively focused on one thing: making YOU a better, more profitable trader. Click the button below to schedule a call with our concierge Customer Care Team to find your best fit today. 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