3 Tips for Buying Options in a Bear Market
Short summary:
critical, and often most misunderstood, aspect of successful options trading is ... And since options are based on stocks, many option investors ...
Long summary:
When youre a stock investor, all you have to pay attention to is which direction the price of the stock is going. And since options are based on stocks, many option investors believe the underlying stock price is the only thing that affects the value of the option. They believe that if a stock is going up, the call options should be gaining value while the put options should be losing value. On the flip side, they believe that if a stock is going down, the call options should be losing value while the put options should be gaining value. But theres a little more to it than that. The five factors that affect the price of an option and the Greek letter by which each factor is known are: 1. DeltaPrice of the underlying security 2. GammaHow quickly Delta changes 3. ThetaTime until expiration 4. VegaVolatility of the underlying security 5. RhoRisk-free interest rates As we discuss these five factors, remember to look at each through the eyes of the option seller, not the option buyer. The option seller is like an insurance company. The seller has to determine how much to charge in premium to offset the risk he or she is taking on by selling the option. Delta The price of the underlying security, while not the only factor that affects the value of an option, is still a major factor. Delta tells you that the price of the underlying security going up will have a positive impact on the value of a call and a negative impact on the value of a put. It also tells you that the price of the underlying security going down will have a negative impact on the value of a call and a positive impact on the value of a put. owned subsidiaries of Investools who each operate their own regulated businesses and do not conduct business under the name Investools. Nothing contained ...
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