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Speaking about time decay, if you bought an option one day, you could watch its price decrease even though the underlying stock or futures contract stays the same.
"An option is said to have intrinsic value if it is in the money. If it is not in the money, it cannot, by definition, have any intrinsic value... Therefore, selling the option back to the market would be worth more to the owner of the call than exercising it."
"When somebody refers to trading options, they are generally referring to the buying and selling of the options themselves. They are actually speculating on the option prices and not on the underlying stock or commodity, although the price of the underlying stock or commodity will have a large bearing on the value of the option."
"The three factors that make up the value of an option are intrinsic value, time value, and volatility."
"When a trader sells an option, he is selling the buyer that right and therefore issuing the obligation to take the other side of the market should the buyer of the option exercise the option. In other words, he 'grants' the option buyer the right to buy or sell the underlying market at the specified price (strike price). This is why option selling is also known as option granting or option writing."
"Buying a call is for bulls. Buying a put is for bears. When selling options, the opposite is true. Selling a put is a bullish strategy. Selling a call is a bearish strategy."
When you give up the chance to make a large gain on a big move upward, you can be increasing your chances dramatically to make a profit on the trade.
"Sell an option that is far enough out of the money and with low enough volatility that the market can move a long way without greatly affecting the price or margin requirement of your option."
Selling options should be a very slow-moving investment.
Volatility is measured by the option's delta.
"If volatility is high, conditions may favor option sellers because they can get more premium for the options they want to sell. If volatility is low, it may favor option buyers because they have to pay less to purchase their options... We generally recommend selling options with low deltas in slightly volatile markets... the delta is not low because the market is not moving: The delta is low because the option is so far out of the money."
You handle risk in option selling by buying back your position prior to expiration.
Leverage that applies to selling options is in futures contracts. I'm not sure if that's true in stocks. I mean, can I use leverage on RobinHood? We'll see, won't we?
"A delta of .1 means the thing has a 10% chance of going in the money. Sell that option and it has a 90% chance of expiring worthless. That is mathematical fact that cannot be disputed."
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Yeah, so it's clear how this info can help me make money. It's the nuts and bolts of options buying and selling. I'm still enjoying this book 4 chapters into it. There's little filler, and I'm absorbing a lot of ideas.
I put the quotes in bold because I immediately got the picture of seeing options charts moving asymmetrically to its underlying stock. How much priority I give to the underlying will be very important. Thanks for stopping by!
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