Get to Know the Options
Options trading have become an invaluable asset for many traders and investors who are aiming to diversify and generate higher returns. Options trading can prove to be a complicated endeavor and investors need to gain a deep understanding of the myriad of options strategies, deriving from different option types and diverse market dynamics.
What are Options?
Options are derivatives that give the investors a certain financial contract which allows them to purchase or sell a security at a set agreed price and by a certain expiration date. Among the most frequently traded types of options, we find Call options and Put options. Call options enable the traders to buy a certain underlying asset, while put options enable them to sell the asset in question.
Options Pricing
Options pricing is a very important part of the options trading process. Investors need to understand the pricing dynamics and the different components which affect an option’s pricing such as volatility, time to expiration and intrinsic/extrinsic value. The options calculator can be used to approximate the pricing of a certain option by taking into account the above-mentioned factors.
Option Strategies
Options strategies, such as spreads, involve taking simultaneous positions in two or more options, with the purpose of decreasing risk, improving returns, and balancing portfolios. Traders can also use these strategies to hedge their portfolio and better manage their risk.
Volatility and Risk Management
Volatility is a determining factor when pricing options. As options are relatively cheaper compared to stocks, options traders can take advantage of the leverage offered by options and benefit from the increased potential return. Along with the leverage, traders need to understand the risk associated with options and trading derivatives, to better manage it and possibly reduce it.
Greeks and Option Chain
As derivatives, options are priced using complex equations which involve numerous variables, called “The Greeks”. These are the quantitative part of options pricing which computes the variation in the option price due to each individual aspect of the market. The option chain is an important tool to track the prices of options and gain a deeper understanding of the market state and the types of strategies a trader can implement.
Implied Volatility
Implied volatility is another critical aspect of options pricing which measures the expectation of how much a stock price can move. Calculating implied volatility is a way to gauge how the prices of options will be shifting in the future. To properly measure it, factors such as the strike price, time till expiration, and the size of the movement need to be taken into account.
MarketXLS and Options Trading
With its built-in option calculator, MarketXLS has developed an efficient tool to help traders quickly make decisions when trading options. Options traders can use the option calculator to quickly compare improved strategies and to choose the one that suits their preferences the most. It is indispensable for every options trader and is a great way to better manage the risk associated with trading stock options.
Ultimately, to be successful trading options, traders need to understand the implications of pricing, implied volatility and the greeks. MarketXLS is a great way to help traders with the decision-making process and the options calculator is a great way to leverage the returns associated with trading stock options.
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