Options

Understanding Option Greeks and Dividends: Theta

Theta refers to time decay and is the amount a theoretical option’s price will change for a corresponding one-unit (day) change in the number of days to expiration of the option contract. Each moment that passes melts away some of the option’s value. Not only does the premium melt away, but it does so at […]

Options

Understanding Option Greeks and Dividends: Vega

Vega is one of the most important Greeks, but it often doesn’t get the respect it deserves. Vega is the amount a theoretical option’s price will change for a corresponding one-unit (percentage-point) change in the implied volatility of the option contract. Simply stated, Vega is the Greek that follows implied volatility (IV) swings. Don’t forget […]

Options

Options Trading Mistake #10: Legging into spread trades

Most beginning options traders try to leg into a spread by buying the option first and selling the second option at a later date. They're trying to lower the cost by a few pennies and it simply isn't worth the risk. Don't leg in if you want to trade a spread. For example, you might […]

Options

Investing in Options: A Beginner’s Guide (Part 1)

Options are a versatile financial instrument for investors. They are also complex and somewhat risky. It's important that you understand the basics of option trading strategy before diving in. What is an option? Options are contracts that give you the right to buy or sell an asset at a fixed price (strike price) for a […]

Options

Options Trading Mistake #7: Failing to factor earnings and dividend dates into your strategy

It pays to keep track of earnings and dividends dates for your underlying stock. For example, if you've sold calls and there's a dividend approaching, it increases the probability you may be assigned early. This is especially true if the dividend is expected to be large. That's because option owners have no rights to a […]

Options

Investing in Options: A Beginner’s Guide (Part 2)

Options traders deploy plenty of jargon, so it pays to get your terminology straight. Here are some of the more common terms you'll run into in the options world. Calls and Puts There are only two different varieties of standard options: call options and put options. Understanding the difference between the two is crucial to […]

Options

Options Trading Mistake #8: Not knowing what to do if you’re assigned early

If you sell options, just remind yourself occasionally that you can be assigned. Lots of new options traders never think about assignment as a possibility until it actually happens to them. It can be jarring if you haven't factored in assignment, especially if you're running a multi-leg strategy like long or short spreads. For example, […]

Options

Investing in Options: A Beginner’s Guide (Part 3)

In the options world, there are two types of volatility: historical and implied. Historical volatility refers to how much the stock price fluctuated (high price to low price each day) over a one-year period. Since it's historical, this figure refers to past price data. If the number of data points is not stated (for example, […]

Options

Options Trading Mistake #9: Failing to use index options for neutral trades

Individual stocks can be quite volatile. For example, if there is major unforeseen news in one particular company, it might well rock the stock for a few days. On the other hand, even serious turmoil in a major company that's part of the S&P 500 probably wouldn't cause that index to fluctuate very much. What's […]

Options

Investing in Options: A Beginner’s Guide (Part 4)

Speaking Greeks For option traders, the Greeks are a series of handy variables that help explain the various factors driving movement in option prices. Although the Greeks collectively indicate how the marketplace expects an option’s price to change, the Greek values are theoretical in nature. There is no guarantee that these forecasts will be correct. […]