Options trading basics: Understanding Greeks, Volatility, and Strikes
Options Trading Strike Price: What is the Meaning?
When it comes to options trading strike price meaning, it can be quite overwhelming but to keep things simple there is “IN THE MONEY”, “OUT OF THE MONEY”, and “AT THE MONEY” strikes, when it comes to IN THE MONEY option strikes, you’re buying an option contract BENEATH the current stock price. For example: If a stock is trading at $101 and you buy an $100 STRIKE you’re buying a $1 “IN THE MONEY” option, where-as if you’re buying an $103 strike option, you’re buying an “OUT OF THE MONEY” option, and if you’re buying an “AT THE MONEY” option you’re buying an $100 strike option as it’s right “AT THE MONEY”. The importance of these varies, but the only one that will maintain any value is the option that is “IN THE MONEY”, as it will always maintain an INTRINSIC value. Out of the money options and At the money options serve their purposes too, depending on the strategy you’re actively employing.
Options Trading Basics: Greeks
When it comes to options trading one of the more challenging concepts to understand is the greeks. Greeks can be overwhelming but I will be covering two of the more basic ones for beginners. They are “DELTA” and “THETA”, and they can be utilized pretty simply. DELTA reacts as an estimate of a per $1 move of a stock, so if the DELTA is an assumed $0.55, the premium you’re in is going to move potentially in the range of $0.55, and that is ALL there is to it on the more basic level. There is more advanced greeks that work with it but for a quick scalp in and out, just focus on the raw DELTA valuation.
When it comes to THETA it’s a rough assumed daily decay rate, a VERY important greek to pay attention to that people often overlook when it comes to trading options. Option greeks trading with Theta means that by the next day, your option will guarantee that much decay overnight, not factoring in other factors such as IMPLIED VOLATILITY which can crush your option more or amplify it depending on the the percent associated.
Trading Options using Implied Volatility: is it hard?
Trading options using implied volatility might seem HARD but it’s all about a % of a move, and undersatnding just how big of a move can impact you can really help. The higher the IV the more the option will move in one direction or another, if the momentum slows or goes against you your option will crush QUITE heavily, there is various counters to measure potential expected moves and when it falls out of that range your option crushes, HARD. Volatility is dangerous, but can also be your friend too if you’re in the RIGHT play.
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