Think about two different companies that have the exact same stock price. Now, let's consider the same option on those two stocks, an option with the same strike prices and same expiration date. Now, why would the price of one option for a company be so different from the option on the other? The answer: Implied volatility. We will looking at how implied volatility affects options prices and how option prices can impact your choice of strategy. Market volatility -> The VIX What is implied volatility and how is it calculated and why is it important? The relationship between stock prices and implied volatility. When stock prices are expected to make a big move up or down, investors typically purchase more options. For example, suppose the market has been falling for a few days. This might cause investors to become more protective of their stock positions. As a result, these investors might buy more put options as a form of protection. This increase in demand suggests there's ...
This will introduce the three main options strategies: speculation income, or protection the advantages and disadvantages of each There are two kinds of options, calls and puts. The first strategy we'll look at is speculation . Usually when a trader buys a call or a put, he is speculating on the stock price. If you think a stock is going to rise, you'd buy a call . If you think the stock is going to fall, you'd buy a put . The advantage of speculating with options, is that it allows you the potential to profit from a securities price movement with a small initial investment for the option contract. However option is significantly riskier than a stock. For example, let's say you're bullish and want to buy a particular stock. Because the stock is trading around $670 per share, purchasing 100 shares would require you to invest about $67,000. However, you can purchase a call option for the same stock for significantly less. Fro example, one contract recently traded for...
We've all heard the saying, "the trend is your friend." This is true when the trend's moving in your direction. Over the course of holding stock, investors expect it to rise over the long term. But keep in mind that stocks rally, pull back, rally, and pull back over and over again. Obviously, if you own a stock, you won't profit when it moves down or sideways in the short term. So what can you do? The answer might be to sell covered calls. By selling a covered call, you could generate a small amount of income and help reduce volatility. In this short video, we'll discuss the basics of covered calls. You'll learn what a covered call is, how to analyze its risk profile, and gain a better idea of whether this strategy is right for you portfolio. Let's start by defining what a covered call is. A covered is when an investor sells a call option contract against an underlying stock position. When you sell or short a call option, you sell someone else the rig...
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