All traders begin with an introduction to call and put options. However, it's rare (apart from short puts) that an experienced trader would use these contracts by themselves. Instead, we primarily trade options spreads. There are many benefits to spreads. The variety of spreads are targeted to various market criteria and market environments.
Remember SFO Magazine? Traders like Jack Schwager and Brett Steenbarger used to write for the publication before its swift shutdown in 2012. What happened. SFO (Stocks, Futures, and Options) magazine was a monthly financial magazine focused on trading and investing in stocks, futures, and options markets.
Warning: options time decay can be a wonderful thing for the option seller. In fact, it is the driving force behind the so-called ‘income-generating’ strategies. The trader holds a position, waits, and then exits with a nice profit. When the position is market-neutral, all gains can be attributed to the magic of time decay.
Investing in the stock market can be a great way to grow your wealth over time. However, it can also be a volatile and unpredictable place, with sudden swings in stock prices causing anxiety for even the most experienced investors. This is where the covered call strategy comes in - a popular options trading strategy that can help manage portfolio volatility.
For reasons that I don’t understand many rookie option traders fear being assigned an exercise notice on a previously sold option. In fact, assignment notice can be a free gift. That gift is likely to be worthless, but on occasion it turns out to be a very welcome surprise.
Put/call parity is a crucial concept in options trading that establishes the basics of option pricing. The formula, introduced in 1969, came years before the seminal Black-Scholes pricing model. As such, it was one of the first formulations of quantitative option pricing and served as the foundation for future pioneers like Black, Merton, and Scholes.
Options are finite, wasting assets. They have a shelf-life, and they cease to exist after their expiration. So when that expiration date comes, there needs to be a mechanism in place to ensure that both sides of an option contract hold up their side of the bargain.
The fear of being assigned early on a short option position is enough to cripple many would-be options traders into sticking by their tried-and-true habit of simply buying puts or calls. After all, theoretically, the counterparty to your short options trade could exercise the option at any time, potentially triggering a Margin Call on your account if you’re undercapitalized.
Most traders get their start with options in stock options. Perhaps they want to bet on a big move in a stock or hedge a long stock position. However, there’s more to the world of options than simply stock options, Index Options, which are options listed for indexes like the S&P 500 index or Nasdaq 100 index.
Making the shift from ordinary financial instruments like stocks and futures to options requires several adjustments. For one, options are nonlinear--an option can go up 10% when the underlying goes from $50 to $51, and then double in price when the underlying goes from $51 to $52.
Undoubtedly, options are more challenging to understand than stocks or futures. The stock price is based on the market's opinion of an honest company's value. An option, on the other hand, derives all of its value from the price of the underlying security.
Options are dynamic, “delta-one” instruments, while stocks and futures are static. No matter how high the price of Tesla stock goes, a $1.00 move will create $1.00 in P&L per share. That same $1.00 price in an underlying alters the Delta, Gamma, and Vega to the point where an option position evolves. The following $1.00 price move will have different implications.
