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root strategies
Long Shares
Analyzing the risk of long shares
Risk Profile & Summary
Standard Setup
Long shares are established by buying shares for current market value. This is usually done in multiples of 100, so that it will pair nicely with any option strategy.
How It Works
Long shares represent ownership of an asset. Depending on the product, they often come with voting rights, and represent an investment in the asset. They profit as their value rises, and lose as their value declines.
Why We Do This
You can buy long shares if you want static meaning delta that won't change with respect to share value. It is not the most nor a high strategy, so we won't be buying outright shares very often. They usually come as a consequence of option
Summary
| Assumption |
Bullish
Long shares profit when their market value increases. |
| Cost Basis |
Debit
Cost basis is equal to the total amount paid for the shares (plus and fees). It can be improved by reducing the total debit paid. |
| POP |
≈50%
We consider shares to have about a 50% probability of profit due to the randomness of the markets. They are essentially a coin flip. |
| Capital Requirement |
Moderate to High
Compared to many option strategies, owning shares tends to be fairly expensive – especially when trading in a such as a retirement account. may only require half of the total value of the shares, but that could also depend on your |
| Break Even (before commission and fees) |
The break-even for long shares is simply the average share price (plus commission and fees):
B/E = Share Debit ÷ # Shares |
| Maximum Profit |
Unlimited
Long shares are not capped on potential profitability, however, nothing rises forever. |
| Maximum Loss |
Debit Paid
The maximum amount you can lose on long shares is equal to the total debit paid. This is calculated by multiplying the number of shares by their average value. Max Loss = Ave. Share Value × # Shares |
| Capital Allocation (per position) |
1-3% of
Generally, for a 50/50 bet, I don't like to risk more than 1-3% of my total capital. |
| Profit Target |
60-Day 25 Delta or 20-25% ROC
There is around a 50% chance that the 25 delta will be breached during the life of the trade. Since orders last for 60 days, I think it's reasonable to set my profit target for the 60-day 25 delta If that return is too low, I may instead aim for a 20-25% |
| Delta (P/L rate of change) |
Static, Positive
Long shares carry static positive delta. This means their delta will remain a constant, regardless of price movement, and they are a strategy. The amount of delta is equal to the number of shares you own. For example, 100 shares is equal 100 deltas; 10 shares is equal to 10 deltas; 200 shares is equal to 200 deltas, and so on. |
| Theta (Time decay) |
None
Shares do not expire, and do not decay in value due to the passage of time. They have no theta value. |
| Vega (Implied volatility sensitivity) |
None
Individual shares are not priced with an implied volatility component and do not carry a vega value. |
| Gamma (P/L Momentum) |
None
As mentioned above, shares carry static delta, meaning their delta value does not change. Therefore, they do not carry a gamma value. |