Unlike other securities like futures contracts, options trading is typically a long - meaning you are buying the option with the hopes of the price going up (in which case you would buy a call option). However, even if you buy a put option (right to sell the security), you are still buying a long option. xA5
How to Calculate Option Value | Sapling
Options trading (especially in the stock market) is affected primarily by the price of the underlying security, time until the expiration of the option, and the volatility of the underlying security. xA5
Intrinsic & Extrinsic Value Explained (Options Trading
An option's intrinsic value can be conceptualized as the value of being able to buy or sell shares at the option's strike price as opposed to the current price of the shares. For example, if a stock is trading for $75, a call option with a strike price of $55 has $75 of intrinsic value. This is because the ability to purchase shares $75 below the market price should be worth at least $75.
At-the-money options will have the most extrinsic value of any option , while out-of-the-money and in-the-money options have less extrinsic value the further the strike price is from the stock price.
If you were buying a long put option for Microsoft, you would be betting that the price of Microsoft shares would decrease up until your contract expires, so that, if you chose to exercise your right to sell those shares, you&apos d be selling them at a higher price than their market value. xA5
Options typically expire on Fridays with different time frames (for example, monthly, bi-monthly, quarterly, etc.). Many options contracts are six months. xA5 xA5
Why would an option with no intrinsic value be worth anything? Well, there's a chance that the option ends up being valuable by the time it expires. An option's extrinsic value is essentially the price associated with the potential for an option to become more valuable before it expires.
In summary, put options have intrinsic value when the stock price is below the strike price. As the stock decreases further below the strike price, the put's price shifts from extrinsic value to intrinsic value. Lastly, any extrinsic value will decay away as expiration approaches.
Historical volatility is a good measure of volatility since it measures how much a stock fluctuated day-to-day over a one-year period of time. On the other hand, implied volatility is an estimation of the volatility of a stock (or security) in the future based on the market over the time of the option contract. xA5
And while there are plenty of other options faux pas, be sure to do your research before getting into the options trading game.
Whether you prefer to play the stock market or invest in an Exchange Traded Fund ( ETF ) or two, you probably know the basics of a variety of securities. But what exactly are options, and what is options trading? xA5