Many investors ask about the fundamentals of options and the difference between types of options. Here I share some background on the fundamentals of option trading. Bonus: An active option trade is shown below for our Covered Call of the Week. There are both similarities and differences between stocks and options. Some think of options …
Stocks and Options: Similarities and Differences Read More »
Exercise and Assignment When a stock option is exercised, the call holder buys the stock, and the put holder sells the stock. When options are exercised, the OCC decides to which brokerage firm the exercise will be assigned, and the brokerage in turn decides which customer will get the assignment. When we are assigned an …
Option Premiums The premium is the price paid or received for an option. Options are traded much like stocks, with bid and ask prices shown: Seller generally receives the bid price Buyer generally pays the asked price Market maker makes or specialist keeps the spread between the bid and ask prices. An example: A …
Income investors need to know about option strike prices to optimize their trades. Here are some basics… Stock option strike prices are the price stated on each call or put option. The strike prices can be classified according to their relationship with the current stock price. There are three categories: In the money (ITM) defined …
There are two types of volatility used in security analysis: historical volatility measures the past price movements and implied volatility that indicates the potential level of future volatility a security is implying. Historical volatility (HV) is the price changes of a security over a period of time so it is really a standard deviation calculation. …
Options Basics – How to Use Volatility in Covered Call Trades Read More »
Vega measures the sensitivity of the price of an option to changes in volatility. Vega is the estimate of the change in theoretical value of an option for the 1% increase in implied volatility. A higher volatility means higher option prices while a lower volatility means lower option prices. Vega is the measure of changing …
Option Basics – What Vega Means to the Covered Write Read More »
The winners in option trading are those who manage the risk within their portfolio. You must always monitor and protect your capital as if you lose your capital you will be out of the game. Proper risk management starts with trading diversification and discipline to stick with your trading plan. There are generally two types …
The most popular Greek is Delta which measures how much an option’s price moves as a result of a $1.00 price change in the underlying stock. Call option values rise with the underlying stock while put prices move inversely with the underlying stock price. Therefore, the deltas of calls and puts must be expressed differently. …
It is widely known in the stock market to buy low and sell high. Options are really no different than stocks as you should buy cheap options and sell expensive options. The entire strategy of selling covered calls is selling overpriced options to generate more income. Call values move in the same direction …
While there are many factors that determine option prices, stock option premiums move in unison with the underlying stock price. The most popular method for determining option value is the Black-Scholes Model. There are six factors in this model: Stock price is the most important factor in an options price as changes in stock price …
