Go back to “Part 1”EXAMPLES FOR INTRINSIC VALUE & TIME VALUE CALCULATION:For Call Option:Current stock price = $30.The price of Call option with Strike Price of $20 = $12This call option is In-The-Money (ITM) option because Strike Price ($20) < Stock Price ($30).Intrinsic Value = Stock Price – Strike Price = $30 – $20 = $10.Time value = Option price – Intrinsic Value (if any) = $12 - $10 = $2Here, the call option is said to be In-The-Money with intrinsic value of $10, as it allows the call option buyer to immediately buy a $30 stock at $20...
Thursday, April 26, 2007
Option Price Components (Part 1)
The price of an option consists of 2 main components:Intrinsic Value and Time Value (Time value is also known as Extrinsic Value).OPTION PRICE = INTRINSIC VALUE + TIME VALUEIntrinsic Value is the value that is already built into the option the moment you bought it. Or in other words, the value by which an option is "in-the-money".Time Value is the difference between an option’s price and its intrinsic value. As the option nears expiration, the time value erodes and eventually becomes zero.Only In-the-Money (ITM) option has intrinsic value.For At-The-Money...
Wednesday, April 25, 2007
In-The-Money, At-The-Money, and Out-Of-The-Money Options (Options Moneyness)
Options MoneynessOptions Moneyness is the relationship between an option’s Strike Price with the current price of the underlying security (i.e. stock price).There are 3 states of Options Moneyness:* In The Money (ITM)* At The Money (ATM)* Out Of The Money (OTM)As the stock price moves, an option would move from one moneyness state to another.Whether an option is In The Money (ITM), At The Money (ATM), and Out of The Money (OTM) is determined by the relationship between an option’s Strike Price with stock price (i.e. where the Option’s Strike Price...
Saturday, April 21, 2007
Options Pricing
Options Pricing:
* In-The-Money, At-The-Money, and Out-Of-The-Money Options (Options Moneyness)
* Option Price Components
* Option Chain
* Option Pricing: How Is Option Priced?
Options Volume, Open Interest & Bid-Ask Price Spread:
* Difference Between Option’s Volume and Open Interest
* How To Determine Options Liquidity?
Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Options Trading Basic – Part 1
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value
* Option Greeks
* Learning Candlestick...
Potential Risk & Rewards of Options Buyer vs. Seller
Potential Risk & Rewards of Options BuyerThe maximum loss of a buyer of an option is the initial premium he pays for the contract, regardless of what happens to the stock. So, the risk to the buyer is limited, never more than the amount spent to buy the options, but the potential profit is theoretically unlimited.Potential Risk & Rewards of Options SellerOn the contrary, in return for the premium received from the buyer, a seller of an option...
Friday, April 20, 2007
When Should You Buy / Sell Call or Put Option?
As we know, buyers would profit if they buy a security at lower price and sell it at a higher price (Buy Low, Sell High), while Sellers would profit if they sell a security at higher price and then buy it back to close their position at a lower price (Sell High, Buy Low).Since Call option price goes up when the underlying stock’s price goes up, and vice versa, we would buy a Call Option if we are bullish and expect a stock will increase before option expires.On the other hand, we will sell or "write" a Call Option if we are bearish and anticipate...
Wednesday, April 18, 2007
Options Buyer vs Seller
There are 4 participants in the options markets:1. Buyers of Call options2. Sellers of Call options3. Buyers of Put options4. Sellers of Put optionsPeople who buy options are called “buyers” or “holders”, and those who sell options are called “sellers” or “writers”. Buyers are said to have “long” positions, and Sellers are said to have “short” positions.Buyers open a position in the market by buying a security and close a position by selling the security. Whereas Sellers open a position by selling a security and close a position by buying back...
Monday, April 16, 2007
What is Put Option?
Put option is a contract that gives the buyer of the options the right to sell the underlying security at a particular price (i.e. strike price) on or before a certain date (i.e. expiration date).The seller (or writer) is, in turn, obligated to buy the security should the buyer chooses to exercise the option.Put option’s price increases when the underlying stock’s price decreases, and decreases as the underlying stock’s price increases (negative relationship).As such, we will buy a Put Option if we think that a stock will move downwards.Example:Using...
Saturday, April 14, 2007
What is Call Option? (Part 2)
Click here to go back to “What is Call Option? (Part 1)”Example:Company ABC is currently trading at $23 per share. You believe the stock will be going up within a short time period. Hence you buy one contract of Call option that gives you the right, but not the obligation, to buy 100 shares of the company anytime in the next 90 days for $25 per share. The option’s price is $0.5, so you will buy one option contract for $50 (multiplied by 100 shares per contract).If your prediction is right and the stock rises to $ 28 per share before the option...
Thursday, April 12, 2007
What is Call Option? (Part 1)
Call option is a contract gives the buyer of the options the right to buy the underlying security at a particular price (i.e. strike price) on or before a certain date (i.e. expiration date).The seller (or writer) is, in turn, obligated to sell the security should the buyer decides to exercise the option.Call option’s price increases when the underlying stock’s price increases, and decreases as the underlying stock’s price decreases (positive relationship).Hence, typically we will buy a Call Option if we expect a stock will go up before option...
Stock Option Contract Specification
An option contract specifies the following:The underlying stock (e.g. AAPL, DELL, MSFT, etc.)The Expiration Date of the contract (i.e. Third Friday of the Expiration Month)The Strike Price (or Exercise Price)Option Type: Call or Put optionThe Price of the option contract, which is often called “Premium”Number of option contractsBy default, one option contract represents 100 shares in the underlying stock, whereas the quoted price of an option is per share. Hence, the quoted price of an option must be multiplied by 100 to get the cost of option...
Stock Trading vs Options Trading
Option trading is much more complex and risky as compared to stock trading.When investing in stocks, you only have to worry about one thing, which is price; whereas in options trading, there are additional variables that influence an option's price.In order to be profitable in stock, you need to be right in the expected direction of underlying stock price movement. In options, on top of that, you also have to be right in the expected magnitude of the movement as well as the time needed for the movement to happen. As a buyer of an option, you will...
Why Option Trading? (Part 2)
Click here to go back to “Why Option Trading? (Part 1)”3. LeverageYou can potentially have greater % return of investment from options trading than from stock trading, given the same move in the underlying stock price.For example:A stock price of Company ABC (currently trading at $96) is expected to increase significantly over the next few weeks. The Call option price for that stock with Strike Price of $95 and 45 days to expiration is $6.If you buy 100 shares of that stock, you need to invest $9,600 to purchase the stock. Assuming the stock price...
Wednesday, April 11, 2007
Why Options Trading? (Part 1)
There are a few reasons why people use options:1. Require less capitalOptions trading generally require less capital than the corresponding stock trading, because option price is only a small fraction of the underlying stock price. When a trader is confident that a stock price will move in a particular direction significantly within a short term, he can invest in options rather than in the stock itself to take advantage of the expected movement because of the limited risk, high potential reward and smaller amount of capital required to control...
Tuesday, April 10, 2007
What is Option Trading?
Option Trading is buying or selling option contracts in an exchange.In the US, there are 6 exchanges that are trading listed/standardized stock options:1. Chicago Board Options Exchange (CBOE)2. The Philadelphia Stock Exchange (PHLX)3. American Stock Exchange (AMEX)4. Boston Options Exchange (BOX)5. International Securities Exchange (ISE)6. NYSE Arca in New York CityAn option trader can trade (buy / sell) options via brokers with option trading services. The broker will buy and sell options in any of the above exchanges on behalf of the trader...
American vs European Style Options
There are 2 styles of stock option: American Style Options and European Style Options.The difference between American and European style options relates to when the options can be exercised:American Style Options can be exercised at any time before or on the expiration date. Most of exchange-traded options are this style. Currently, all stock options in the US market are American style. European Style Options can be exercised only at the expiration date.Note:American or European styles do not imply where the stock options are being traded. It does...
Do All Stocks Offer Stock Options?
Not all stocks have stock options traded publicly in the exchanges. Stocks that offer publicly traded stock options in the exchanges for option trading are called Optionable Stocks.The following are 4 criteria a company must meet in order for their stock options to be traded publicly in the option exchanges:The stock must be listed on the NYSE, AMEX or Nasdaq. The company must have >= 2,000 shareholders. The company must have >= 7 million publicly held shares.The closing price must have a minimum per share price for a majority of trading...
What is Stock Option?
A stock option is a contract that gives the buyer of the contract the right, but not the obligation, to buy or sell a security at a certain price (i.e. strike price) on or before a certain date (i.e. expiration date).After this expiration date, the option would cease to exist. In the US market, stock options expire on the third Friday of each expiration month. If that Friday is a holiday, then the options expire on Thursday.Note:Stock option here does not refer to the Employee Stock Option, but to exchange-traded option.Here are the differences...
Options Trading Basic
Click the following links to read each of the articles:
* What is Stock Option?
* Do All Stocks Offer Stock Options?
* American vs European Style Options
* What is Option Trading?
* Why Option Trading?
* Stock Trading vs Option Trading
* Stock Option Contract Specification
* What is Call Option?
* What is Put Option?
Buying vs. Selling Options:
* Options Buyer vs Seller
* When Should You Buy / Sell Call or Put Option?
* Potential Risk & Rewards of Options Buyer vs. Seller
Related Topics:
* FREE Trading Educational Videos You Should Not...
Monday, April 9, 2007
Options Trading? What Is That?
I heard many people make a living from stock and options trading, and many can make lots of money and even became a millionaire from it. Wow, so wonderful! But is it that easy to make money from trading?I became so interested to know more & even to learn about that. I knew a little bit about what options is from my financial management lesson during the uni days. But that’s only an introduction to options.Where can I find out more about that? How can I learn the basic of option trading in practice? How does option work? What strategy to use?...
Sunday, April 8, 2007
Trading is a Learning Journey
When I first started learning about options trading, I was really so overwhelmed. Oh my, there are so many things to learn! I still don’t understand this & that. Which one to start first? There are so many books & websites to learn from. I was so eager to learn, but it’s just too much until I couldn’t get focus. The more I read, the more I feel I still don’t know much and the more I hesitate to even start trading.After some time, I realize that trading is not a one-time learning thing (many things are not too, actually). If you want to...
