Making the 100% Correlation Between Traditional Stock Options Components and TheWolfLineTM Sports Options (WolfLineOptionsTM) Components
IF IT CAN BE PROVEN THAT (A=B), THEN EVERYTHING THAT APPLIES TO (A) CAN ALSO, AND MUST BE, APPLIED TO (B)
Traditional Stock Options Components:
- Stock Price
- Strike Price
- Time to Expiration of Contract (Weekly, Monthly, LEAPs, etc.)
- Implied Volatility (Market Expectation of Amount of Underlying Stock Price Movement During the Length of the Contract). Implied Volatility is Most Sensitive/Relevant in the "At The Money" Strike Price and Less Sensitive/Relevant in the "Out of the Money" and/or "In The Money" Strike Prices. The "At the Money" Strike Price is the Strike Price That Gets a Large Majority of the Contract Open Interest and/or Volume. The "Out of the Money" and/or "In the Money" Strike Prices Get Much Less Contract Open Interest and/or Volume.
- Cost of Carry of the Option (Interest – Dividend) …Cost of Carry is Basically a Negligible Component of the Option
Sports Options (WolfLineOptionsTM) Components:
- Stock Price (Score of Match/Game, etc.)
- Strike Price (Pointspread/Handicap Price)
- Time to Expiration of Contract (Quarter, Period, Half, Full Match/Game, etc.)
- Implied Volatility (Market Expectation of Amount of Scoring During the Length of the Contract/Quarter, Period, Half, Full Match/Game, etc.) Implied Volatility is Most Sensitive/Relevant in the Pointspread/Handicap Line…Same as the "At The Money" Strike Price. Implied Volatility is Less Sensitive/Relevant in the Underdog MoneyLine...Same as the "Out of The Money" Strike Prices and the Favorite MoneyLine…Same as the "In The Money" Strike Prices. These Concepts of Which Sports Market Lines Have More/Less Sensitivity to Volatility Are Important to Understand When Trading Volatility/Scoring Totals/Over-Unders. Additionally, the Pointspread/Handicap Line Gets the Large Majority of the Handle/Volume…Like the "At The Money" Strike Price. The Underdog MoneyLine and the Favorite MoneyLine Get Much Less Handle/Volume…Like the "Out of The Money" and "In The Money" Strike Prices Respectively. This is Also a Very Important Theoretical Conceptual Correlation Between Traditional Stock Options and WolfLineOptionsTM for Sports Trading.
- There Is No Application of the Carry Cost Concept for WolfLineOptionsTM for Sports Trading
WolfLineOptionsTM Puts and Calls, Delta, Strike Prices and Implied Volatility
Like Traditional Stock Options, WolfLineOptionsTM are represented as "Puts" and "Calls". A Put is a short/negative directional market instrument where the buyer is speculating that the underlying asset (stock price/match score) will be lower than a certain level by a certain time (end of the contract, quarter, half, match, etc.). Conversely, the seller of the Put is speculating the opposite. The Put seller is speculating that the underlying asset will NOT be lower than a certain level by the end of the contract (this is how a trade between the two parties can be agreed upon and executed in a free market). The directional mechanics/speculations of the Calls in WolfLineOptionsTM are the exact opposite of the Puts. The Calls are a long/positive directional market instrument. As the old adage for traditional options goes (in terms of simple direction of the underlying asset/stock, etc.), "Call you up"/"Put me down". When we are making reference to WolfLineOptionsTM, the variables that will be addressed will always be "probability, volatility (total), time to expiration, price (score of match, et al) and strike price (handicap/pointspread)" as well as the effects that these variables have on each other when they change. These proprietary, conceptual applications of option theory to sports trading markets have changed the global model of the mechanics of derivative economics in the context of sport (alternative contexts previously not thought to be consistent with financial market option/derivative theory).
There is a fact that is widely understood as self-evident that options trading/derivative theory is very complicated and that in the entire spectrum of the global financial market professionals (millions of people), proprietary options traders are far and away the most advanced micro-culture in that spectrum. If we simply concentrate on stocks, commodities, currencies, etc. (for simplicity purposes), the standard directional trade only needs to be concerned with price action. However, the options trader that deals in the buying/selling of the derivatives of these underlying assets, and/or the underlying assets themselves, needs to be concerned with price, time, probability and volatility and the effects that all of these variables have on each other. Here is the good news: 1) WolfLineOptionsTM sports options are 100% correlated to financial options (as related to binary/barrier/all or nothing considerations. This means that the options are held until the expiration of the contract, end of the match, etc. and a price/probability/volatility threshold is either successful/100% or unsuccessful/0%) 2) Most traditional financial options concepts and strategies that I make comparisons with will be simple for many sports speculators to understand because they have already been introduced to the concepts in the world of sports gaming…only in a non-traditional sense that they did not realize. In other words, one of the main goals of WolfLineOptionsTM sports options is to demystify the intimidating nature of traditional financial options/derivatives and bring the theory, strategies and application of options trading to millions of people (the entire sports trading universe) for them to use in the context/market of their choosing (sports, stocks, currencies, et al).
If we are using theory and strategy for trades/positions that are to be put on before the match/quarter/half/period, etc. and held until expiration of the contract/match/quarter/half/period, etc. (the overwhelming majority of volume is trades/positions that are executed in this manner although "live"/"in game"/"in running" positions are becoming much more popular), we only need to know one Greek options risk variable ("*WolfLine Delta" …which is likely the most important one), Implied volatility, which strike prices are "at the money"/"in the money"/"out of the money" and how much time is in the contract. *WolfLine Gamma (effect of score change on probability), *WolfLine Theta (effect of passage of time on probability) and *WolfLine Vega/Tau (effect of implied volatility change on probability…WolfLine Vega/Tau can also have effect on probability/WolfLine Delta before the match/contract begins) become relevant as conditions change during the confines of the contract/match ("live"/"in game"/"in running") and those Greek risk variables/theory/applications are discussed in another article.
The 3 definitions for "Delta" in the context of traditional option trading/derivative theory are:
- Hedge Ratio (Not applicable to sports trading)
- Percent change in the price of an option based on a one unit change in the price of the underlying instrument, stock, currency, etc. (Not applicable to sports trading)
- Percent chance that the option will finish the contract "in the money" at the time of expiration of the contract (That’s the one that we want)
When we read definition #3 for "Delta" in option theory, that is the EXACT definition for THE MONEYLINE MARKET of a sports trading contract (*WolfLine Delta will be referenced simply as "Delta"). To find out the delta of a sports speculation contract, we simply need to find "mid-market/fair value" between the price of the favorite and underdog and then convert that relationship price to a %...we have now established a delta for both the favorite and the underdog and the sum of those two %s will obviously always add up to 100%. Because of this two sided/inversely proportional relationship of % probability, we can ascertain the concept of "put-call parity" very readily. If we have a moneyline market where Team A is a -160/+140 favorite over Team B, we can draw several conclusions about the WolfLineOptionsTM for this market. Mid-market/fair value is Team A is a 1.5 to 1 favorite over Team B. Simply, this means that if this same match were to be played an infinite number of times, the market currently agrees that Team A will win 1.5 times out of every 2.5 times played and Team B will win 1 time out of every 2.5 times played. This makes the market probability percentage 60% to 40% in favor of Team A. From this information we can now assign WolfLineOptionsTM delta values to all puts and calls for Team A and Team B at pre-match market price:
- Team A call delta is 60
- Team A put delta is (-40)
- Team B call delta is (40)
- Team B put delta is (-60)
*Put deltas are always represented by negative values because puts are a negative directional instrument and calls are always represented by positive values because they are a positive directional instrument. For probability reference, the absolute value should be used. If delta is > 50 (absolute value), that option is said to be "In the Money" if delta is < 50 (absolute value) that delta is said to be "Out of the Money". If a delta is ̴50 (absolute value), that option is said to be "at the money" and represents market equilibrium (the market agreed upon handicap/pointspread). The "At the Money" options are the most sensitive to volatility variance and are the WolfLineOptionsTM that are bought/sold to represent both directional handicap/pointspread (relative strength/price) speculation and totals/over-under (volatility) speculation. That being said, whenever options are purchased, (OTM, ATM or ITM) the trader is becoming "longer volatility" and whenever options are sold, the trader is becoming "shorter volatility". The purchase/sale of stock on its own would not initiate/adjust a position’s sensitivity to volatility (a scoring total/over-under speculation). The purchase/sale of stock on its own is a directional speculation only unless an option is "attached" to it (e.g. a "buy-write" is long stock/short an upside call. That strategy is "long directionally/short volatility". Also, a "protective put/married put" is long stock/long a downside put. That strategy is "long directionally/long volatility". I address those strategies, and many others, as applied to WolfLineOptionsTM in another article. As long as we know the moneyline market, the handicap/pointspread market, the totals market and the duration of the contract, we can construct all of these "complicated" and "advanced" options positions in the context of sports trading.).
We can now draw the following conclusions regarding the parity of the probability of this relationship and the absolute values of their corresponding puts and calls:
- Team A call delta + Team A put delta = 100
- Team A call delta + Team B call delta = 100
- Team B call delta + Team B put delta = 100
- Team B put delta + Team A put delta = 100
These rules represent the put/call parity and duality of WolfLineOptionsTM. Additionally, from a directional price/probability perspective, the "duality" of the "two sided relationship structure" of the sports trading market makes for many different ways to establish a directionally speculative position while also having different (opposing) potential positions on volatility. In other words, if a trader is buying (getting long) one side of a trade/relationship, he is simultaneously selling (getting short) the other side of the trade/relationship.
So…from a directional market speculation position structure consideration, we can make the following standard relationship correlations for sports trading:
Buying (directionally long) side A stock = selling (directionally short) side B stock…via pointspread/handicap/relative strength/price market
Selling (directionally short) side A stock = buying (directionally long) side B stock…via pointspread/handicap/relative strength/price market
Long side A "At the Money" call = short side A "At the Money" put = long side B "At the Money" put = short side B "At the Money" call…via pointspread/handicap/relative strength/price market
Short side A "At the Money" call = long side A "At the Money" put = short side B "At the Money" put = long side B "At the Money" call…via pointspread/handicap/relative strength/price market
Long side A "In the Money" call = short side A "Out of the Money" put = long side B "In the Money" put = short side B
"Out of the Money" call…Side A is favorite/Delta > 50; Side B is underdog/Delta < 50…via moneyline/probability/Delta market
Short side A "In the Money" call = long side A "Out of the Money" put = short side B "In the Money" put = long side B "Out of the Money" call…Side A is favorite/Delta > 50; Side B is underdog/Delta < 50…via moneyline/probability/Delta market
Long side A "Out of the Money "call = short side A "In the Money" put = short side B "In the Money" call = long side B "Out of the Money" put…Side B is favorite/Delta > 50; Side A is underdog/Delta < 50…via moneyline/probability/Delta market
Short side A "Out of the Money" call = long side A "In the Money" put = long side B "In the Money" call = short side B "Out of the Money" put…Side B is favorite/Delta > 50; Side A is underdog/Delta < 50…via moneyline/probability/Delta market
These multiple variations of directional bias/speculation construction in WolfLineOptionsTM, and the relationship between the puts, calls and underlying stock, allow for many strategies to be built using price, probability and volatility in the sports trading markets. Considering the 100% correlations that I have made between traditional financial options position construction/components and WolfLineOptionsTM position construction/components for sports trading, it is completely invalid and irrational to try to defend any law or bill that attempts to deny sports trading from the same legal classification as traditional financial trading (this includes PASPA, UIGEA and RAWA in the United States and similar inappropriate legislative structure in other jurisdictions/countries around the world)
By K. Gregory Wolfe
Icarus Hegel Analytics, LLC