Basic Definition of an Option The definition of an option sounds complicated, particularly if this is the first time you’re encountering it, so don’t be too concerned if it isn’t making complete sense right away. This course will help you understand the basics of options. With that said, here is the general definition of [...]
Option Components Options have five main standardised terms by which they are defined: Type of option (call or put) Underlying security (specific stock or index) Exercise (or strike) price Expiry date Option premium These five variables distinguish each individual option from every other available option. Each time you enter a trade using options, these [...]
Buying a put option is a welcomed alternative to short selling a stock. Although both strategies offer traders the chance to make a profit from a decrease in a market, only buying a put does so with limited risk. A put option gives the buyer the right, but not the obligation, to sell 1,000 [...]
Call options are an attractive alternative to buying the stock. The list below provides an inventory of a call’s properties. Call options give the buyer the right, but not the obligation to buy an underlying stock at the call’s strike price. In the US, each stock option typically represents 100 shares of the underlying [...]
Types of Options In this section we’ll give you some more context to the way that options markets work and who are the main participants involved. There are two main types of options: Over the Counter (OTC) options and Exchange Traded Options (ETO). OTCs are privately traded between the buyer and seller and include [...]
In the beginning, options trading will most likely be a little confusing. These sections are valuable and should be reviewed until the concepts are clear. As you read ahead, refer back to these sections for clarity and it will all come together. Basic Mechanics of Going Long and Short It is essential to have [...]
The Internet has made the process of reviewing option prices extremely easy. There are dozens of sites that provide quote services. Some of these services provide real- time quotes, but most are delayed by at least 20 minutes. If you want to receive streaming real-time data, you must be willing to pay for it. [...]
An option pricing model is a mathematical formula used to determine the theoretical fair-value of an option. By inserting the components just covered into a pricing model, a trader can determine what an option should be theoretically worth. Keep in mind that the price at which an option trades may bear no resemblance to [...]
Volatility is one of the most important variables in options trading. It significantly impacts an option’s premium and contributes heavily to an option’s extrinsic value. Volatility can be defined as a measurement of the amount an underlying instrument is expected to fluctuate in a given period of time. In basic terms, volatility is the [...]
The options greeks are a set of measurements that quantify an option position’s exposure to risk. Options and other trading instruments have a variety of risk exposures that can vary dramatically over time or as markets move. Each of the option greeks represents a different variable of option pricing. To assess the probability of [...]
A Risk Curve, or payoff diagram as they are sometimes referred to, is a graphic representation of the profit or loss of a position in relation to price changes in the underlying security. When drawn with software, risk profiles can also take into account the effects of changes in time and volatility of the [...]
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