Online option trading trading academy
Options can be combined like Lego blocks to create positions to fit varying market outlooks. We can assemble the blocks into a position that will be most beneficial if our outlook on the outcome of the three main forces that change option prices is correct. These three forces are:. We can build an option position that is designed to take advantage of any one, or any combination of these three option forces.
Here is an example of a situation where we have a strong opinion on the likely direction online option trading trading academy stock price movement; but not on whether changing market expectations going forward are more likely to inflate or deflate option prices.
This is a bearish trade situation. The simplest kind of bearish option trade is to buy put options. A drop in the stock price raises the price of put options, all other things being equal.
The problem, of course, is that all other things are never equal. Online option trading trading academy this case, note the ending position of the red line in the subgraph below the price chart. That red line plots Implied Volatility. This particular indicator is a proprietary one available to our students which is designed to make it clear at a glance that the current level is high, low or in the middle of its historical range. The raw implied volatility information is available in most trading platforms.
Here the current level of implied volatility is right in the middle of its range. If it were on the high side we would expect it to drop, and if it were low we would expect it to rise. Here it is neither. If we simply bought puts in this situation, the value of those puts would be hurt if implied volatility drops — and there is a good chance of that. The second simple online option trading trading academy option trade is just to sell calls short. If implied volatility rises, then the value online option trading trading academy all options will be pushed upward.
This will hurt us if we have sold options short. It consists of three parts:. For now the summary is:. Disclaimer This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument online option trading trading academy.
Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever online option trading trading academy the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein.
Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.
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