Indeed, over the last decade the volume of derivative trading has In BAFI 430 you will study the basics of forwards, futures and option markets. Probability Modeling Steve Lentz presents a fast review of options basics and trading systems. An option is a standardized contract providing for the right - but not the obligation - to buy or sell an underlying financial instrument.
In exchange for the right to buy ("call") or sell ("put") an underlying security on or before the expiration date, the purchaser of an option pays a premium.
The strike price, or exercise price, of an option determines whether that contract is in the money, at the money, or out of the money.
If the stock were at 500 when you bought a 510 call, the option is again all time value, since it has to rise $10 to be in the money.
Again using Google for an example, the GOOG December 500 call option gives you the right to buy 100 shares of GOOG for $500 per share up until the expiration date in December. Let's say you purchased the GOOG 500 call option for $25 when the stock was trading for $500.
The flip side is that if the stock does not move up, then the option will lose all of its value by expiration. In this case, let's say you were concerned about the downside, so you purchased the GOOG 500 put option for $25 when GOOG the stock was trading for $500.
Letting it expire - If a put gets all the way to expiration, it will expire, worthless if it is out of the money (when the stock price is above the strike price - See Options Pricing). Two, options should generally be bought when the time value - primarily influenced by a factor known as implied volatility, or the expected price swings of the underlying - is expected to stay flat or to rise. Finally, when you buy an option, generally you will want to sell it, ideally for a still-greater premium. By way of explanation, let's say you sold the GOOG 500 call option for $25 when GOOG was trading for $500. Letting it expire -If the option gets all the way to expiration, it will expire, worthless if it is out of the money. Assignment - American-style options (all equity and ETF options) can be exercised at any time before expiration.
Selling options is best done when implied volatilities, and therefore option premiums, are high and expected to fall.
Since we already know that time decay is greatest in the last 30 to 45 days, this is typically the best time to sell options. Example: Apple (AAPL) is trading for 175, a price you like, and you sell an at-the-money put for $9. The process in which the buyer of an option takes, or makes, delivery of the underlying contract.


The process by which the seller of an option is notified that the contract has been exercised. High open interest figures, generally near the at-the-money strikes, tell us there are more prospective trading partners who could accept your price.
In consideration of your time, we'll send the first two chapters of Jon and Pete's latest book, How We Trade Options. All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, or individual's trading does not guarantee future results or returns. If the strike price of a call option is less than the current market price of the underlying security, the call is said to be in the money because the holder of the call has the right to buy the stock at a price which is less than the price he would have to pay to buy the stock in the market. If GOOG were trading at $500 when you bought a 490 strike call option for $25, then $10 of the option's value would be intrinsic value. You would do this with the expectation that the price of the option will rise, usually through the rise in the price of the underlying stock.
This is the most common way of exiting a long position, and the only way of exiting a long call that captures any remaining time value in the option.
This is the only way of exiting a long position that captures any remaining time value in the option.
One, the expiration should give the option enough time to perform without being overexposed to time decay. Buying options is a limited-risk strategy, and all of that risk lies in the premium paid for the option. When option premiums are high (that is, when implied volatility is high), some traders turn to selling options. Here we the ideal is to have the options expire worthless, and we are not interested in buying back the options we have sold unless necessary. INTC moves up to $28 and so your option gains at least $2 in value, giving you a 200% gain versus a 12% increase in the stock.
Option chains show data for a given underlying's different strike prices and expiration months. This information neither is, nor should be construed, as an offer, or a solicitation of an offer, to buy or sell securities by OptionsHouse.
After spending decades in the trading pits of Chicago, Jon 'DRJ' and Pete Najarian founded the company in 2005 to help people better manage their own investment portfolios. Likewise, if a put option has a strike price that is greater than the current market price of the underlying security, it is also said to be in the money because the holder of this put has the right to sell the stock at a price which is greater than the price he would receive in the market. Therefore an at-the money or out-of-the-money option has no intrinsic value and only time value. This gives you a 100 percent return on the call option based on a 10 percent return on the stock.


Long options are almost always sold before expiring, as at that point they will have lost all time value. Since options have an expiration date, a large part of their value is time value (for more, see our lesson on Options Pricing).
All else equal, if there is a rise in implied volatility, then there will be a rise in the option premiums.
It is also the reason that selling calls is considered the options strategy with the highest risk. Another way to buy stock for less than the current market price is an options strategy called cash-secured puts. For instance, if you sold a call, the stock went up through your strike, and you do not want to be assigned and forced to sell the stock, you could buy back the option to close the position. It is important to remember, however, that selling options involves considerable risk, and high implied volatility can always go higher.
If the stock is still at 34 at expiration, the option will expire worthless, and you made a 3% return on your holdings in a flat market.
This should not be considered a solicitation to open an OptionsHouse account or to trade with OptionsHouse. OptionsHouse does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any particular investment or investment strategy, and you shall be fully responsible for any investment decisions you make, and such decisions will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs. The higher the implied volatility, the more expectation that the underlying stock will make big moves, increasing the option's chances of being in the money. This time value will deteriorate as that expiration approaches; time decay increases exponentially in the last 30 to 45 days of an options life, so this is usually not the time to own options. This increase can produce profits for long options, even if the stock price doesn't move, because the chance of movement has increased. If the strike price equals the current market price, the option is said to be at the money. Conversely, if you buy options when implied volatility and premiums are high, such as before earnings, then the stock can move in the direction that you want and you can still lose money, because with the news out, the implied volatility could fall. It is for largely that reason that most retail options traders underestimate the challenge of making money with options.



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