Option quotes, technically called option chains, contain a range of available strike prices.
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The price you pay for an option, called the premium, has two components: Intrinsic value is the difference between the strike price and the share price, if the stock price is above the strike. Time value is whatever is left, and factors in how volatile the stock is, the time to expiration and interest rates, among other elements. This leads us to the final choice you need to make before buying an options contract. Determine the time frame during which the stock is likely to move Every options contract has an expiration date that indicates the last day you can exercise the option.
Your choices are mxrket to the ones offered when you call up an option chain. Expiration dates can range from days to months to years. Daily and weekly options tend to be the riskiest and are reserved for seasoned option traders. For long-term investors, monthly and yearly expiration dates are preferable.
How to sell calls and puts
Longer expirations give the stock more time to move and time for your investment thesis to play out. A buyer for a call option is ootion a position that underlying instrument e. A buyer of put option is taking the opposite position that the underlying instrument e. However, there are few more things to keep in mind, before you jump in options trading. One should be aware of the strike price and days remaining before expiry as well.
Options decay in value as their price is dependent on variable known as theta, which is also known as the rate of decay. Simply speaking, if you are an options buyer, your options will lose a little bit of value each day, even if the underlying instrument is not moving at all, due to time decay. Due to this reason, professional traders or large institutions are biased towards options selling, rather than options buying, as they can benefit from this time decay if underlying instrument is not moving at all. However, option selling is akin to selling insurance and hence is detrimental to an individual retail trader as the potential liability can be significant if volatility increases overnight.
Another way to benefit from options is to take a combination trade in options. A trader expecting the stock or index price to change dramatically in next few days can pht an options straddle. A long straddle involves purchasing both a call option and a put option on the same stock or index at the same strike price and expiry date. For example, if Infosys is coming up with its quarterly results and investors are not sure whether it will be a positive result or not, one can buy a call option and put option at same strike price, preferably closer to current stock price.
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If results are good, call options would rise in price and would make up a profitable trade, else if results are less than expected put options would result in profits for the trader. Optuon strategy is considered "covered" because the 2 positions owning the stock and selling calls are offsetting. Although there is still significant risk, selling covered options is a less risky strategy than selling uncovered also known as naked positions because covered strategies are usually offsetting. In our covered call example, if the stock price rises, the XYZ shares that the investor owns will increase in value.
If the stock rises in value above the strike price, the option may be exercised and the stock called away.
Consider the core elements in an options trade
mmarket Thus selling a covered call limits the price appreciation of the underlying stock. Conversely, if the stock price falls, there is an increased probability that the seller of the XYZ call options will get to keep the premium. Uncovered strategies involve selling options on a security that is not owned. In our example above, an uncovered position would involve selling April call options on a stock the investor does not own.
Selling uncovered calls involves unlimited risk because the underlying asset could theoretically increase indefinitely. If assigned, the seller would be short stock. They would hickets be obligated to buy the security on the open market at rising prices to deliver it to the buyer exercising the call at the strike price. Selling puts The intent of selling puts is the same as that of selling calls; the goal is for the options to expire worthless. The strategy of selling uncovered puts, more commonly known as naked puts, involves selling puts on a security that is not being shorted at the same time.