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Unlocking Key Investments through Live Option Chain

Written by  MarketXLS Team on 
Mon Jan 16 2023
 about Option Strategies
Unlocking Key Investments through Live Option Chain - MarketXLS

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Unlocking Key Investments through Live Option Chain - MarketXLS

Unlocking Key Investments through Live Option Chain

Options trading is a powerful financial tool that offers limitless possibilities for the investor. To understand the workings of options trading, however, one must have an in-depth insight into the characteristics of call and put options, strike price, option premium, implied volatility, greeks and time decay, open interest, as well as the principles of market pricing. Furthermore, in order to accurately anticipate market movements and identify profitable trades, the option trader must be armed with a thorough knowledge understanding of the underlying stock, expiration date, risk and reward analysis, and have a clear handle on the various bullish and bearish strategies and option strategies that allow for leverage.

Call and Put Options

Call and put options are at the core of all options trades. Calls are contracts that give the holder the right, though not the obligation, to purchase a certain number of shares at a predetermined strike price, if the underlying asset is trading on the market higher than the strike price before the expiration date. Put options work in the exact reverse. Put options give the buyer the right to sell a certain number of shares of the underlying asset at the strike price, when the underlying asset is trading below it, before the expiration date.

Option Premium and Strike Price

The option premium is the price that the option buyer pays to become an option holder. This payment is held by the seller, also known as the option writer, until the date of expiration, which is agreed upon at the time of purchase. If a call option is in-the-money (ITM) at the time of expiration, meaning it is trading higher than the strike price, the option buyer profits the difference between the underlying and the strike price, minus the premium. Put options work in the exact reverse.

The strike price is the predetermined price at which the option buyer can exercise the option, either buy or sell the underlying stock. As the option buyer, you want the underlying asset to be above the strike price for calls and below the strike price for puts.

Implied Volatility and Greeks

The implied volatility (IV) of an option is the estimated volatility of the underlying asset during the life of the option. It is a measure of market sentiment and determined by the demand and supply of the options in the market. It is comprehensive indicator of market risk or uncertainty and tells how expensive it is to buy a call or a put option. The higher IV, the higher the price of buying an option. Option traders use this information to identify the right strategy to use in pricing and trading options.

Option Greeks are the main risk factors for an option trade. Option traders analyze these to assess the risk and reward of their trades. These Greeks include Delta, Gamma, Theta, Vega, Rho and Charm. Delta measures how much the option’s price can change against the underlying stock’s price change. Gamma indicates the rate of changes in Delta. Theta is the rate at which the option loses value due to time decay. Vegais the rate at which the option’s value changes with implied volatility (IV), Rho measures the impact of interest rates on the option’s price and Charm measures the rate of change of gamma with respect to the change in the underlying stock’s price.

Time Decay, Open Interest and Market Pricing

Time decay is the decrease in an option’s value as time erodes away. This is an important concept to understand when entering an options trade. Open interest is the total number of outstanding contracts that have been opened on an option. Market pricing is the concept behind the pricing of options, which is based on supply and demand.

Underlying Stock and Expiration Date

The underlying stock is the asset which the option’s value is derived from. It can be any stock, stock index, currency, or other commodity. On the other hand, the expiration date is the date when the option holder’s ability to exercise the option terminates.

Risk/Reward Analysis and Bullish/Bearish Strategies

Risk/reward analysis is an important concept to consider when entering an options trade. It involves researching a possible trade decision and counting potential profits against losses that might occur. Bullish and bearish strategies can be employed by the option trader to gain from either an upward or downward market movement. Bullish strategies expect the stock to appreciate in value, whereas bearish strategies seek to benefit from a decline in the stock’s value.

Options Strategies and Leverage

Here are some templates that you can use to create your own models

Synthetic Short Straddle with Calls
Synthetic Short Straddle with Puts

Search for all Templates here: https://marketxls.com/templates/

Relevant blogs that you can read to learn more about the topic

Covered Calls- Managing And Tracking
Options Profit Calculator
Real Time Stock Option Pricing In Excel (Any Version)
Using Marketxls To Find The Best Cash-Secured Put Option To Sell
Using Marketxls To Find The Best Covered Call Option To Sell, Based On Your Situation

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Ankur Mohan MarketXLS
Welcome! I'm Ankur, the founder and CEO of MarketXLS. With more than ten years of experience, I have assisted over 2,500 customers in developing personalized investment research strategies and monitoring systems using Excel.

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