This can be done to either realize a profitable gain in the option's premium, or to cut a loss. The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. You alone are responsible for evaluating the merits and risks associated with the use of our systems, services or products. System response and access times may vary due to market conditions, system performance, and other factors. Options investors may lose the entire amount of their investment in a relatively short period of time. A decrease in the underlying security's value will generally have the opposite effect. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct.
40 detailed options trading strategies including single-leg option calls and puts and advanced multi-leg option strategies like butterflies and strangles.
What you'll learn
The longer the amount of time for market conditions to work to an investor's benefit, the greater the time value. There are six major factors that influence option premiums. The factors having the greatest effect are:. Changes in the underlying security price can increase or decrease the value of an option.
These price changes have opposite effects on calls and puts. For instance, as the value of the underlying security rises, a call will generally increase and the value of a put will generally decrease in price. A decrease in the underlying security's value will generally have the opposite effect. The strike price determines whether or not an option has any intrinsic value.
An option's premium intrinsic value plus time value generally increases as the option becomes further in the money, and decreases as the option becomes more deeply out of the money.
Time until expiration , as discussed above, affects the time value component of an option's premium. Generally, as expiration approaches, the levels of an option's time value, for both puts and calls, decreases or "erodes. The effect of volatility is the most subjective and perhaps the most difficult factor to quantify, but it can have a significant impact on the time value portion of an option's premium.
Volatility is simply a measure of risk uncertainty , or variability of price of an option's underlying security.
Higher volatility estimates reflect greater expected fluctuations in either direction in underlying price levels. This expectation generally results in higher option premiums for puts and calls alike, and is most noticeable with at-the-money options. A long call option offers a leveraged alternative to a position in the stock. As the contract becomes more profitable, increasing leverage can result in large percentage profits because purchasing calls generally requires lower up-front capital commitment than with an outright purchase of the underlying stock.
Long call contracts offer the investor a pre-determined risk. At expiration an in-the-money call will generally be worth its intrinsic value. Whatever your motivation for purchasing the call, weigh the potential reward against the potential loss of the entire premium paid. Positive Effect If Volatility Decreases: Negative Effect Any effect of volatility on the option's total premium is on the time value portion.
Negative Effect The time value portion of an option's premium, which the option holder has "purchased" by paying for the option, generally decreases, or decays, with the passage of time.
This decrease accelerates as the option contract approaches expiration. At any given time before expiration, a call option holder can sell the call in the listed options marketplace to close out the position. This can be done to either realize a profitable gain in the option's premium, or to cut a loss. At expiration, most investors holding an in-the-money call option will elect to sell the option in the marketplace if it has value, before the end of trading on the option's last trading day.
An alternative is to exercise the call, resulting in the purchase of an equivalent number of underlying shares at the strike price. The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any of the securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of TradeKing or its employees.
TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment advice. You alone are responsible for evaluating the merits and risks associated with the use of our systems, services or products. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns.
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Options Strategies: Long Call Purchasing calls has remained the most popular strategy with investors since listed options were first introduced. Before moving into more complex bullish and bearish strategies, an investor should thoroughly understand the fundamentals about buying and holding call options. Options Pricing Main Components of an Options Premium. (Calls): When the underlying security's price is higher than the strike price a call option is said to be "in-the-money." Intrinsic Value (Puts): and does not represent the opinions of TradeKing or its employees. TradeKing provides self-directed investors with discount brokerage. Mistake #1: Buying out-of-the-money (OTM) call options Trading OTM calls is one of the most difficult ways to make money consistently. If you're new to options trading, consider another strategy first.