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Clear filtersWhat an Option Price Is Made Of
A premium splits into intrinsic value, which is arithmetic, and extrinsic value, which is entirely a function of time and expected movement.
Implied Volatility and the Expected Move
Option prices translate into a market expectation of how far a security will move. It is useful information even to someone who never trades an option.
Covered Calls
Selling a call against shares already held. The premium is received in exchange for capping the position's upside, which is a trade rather than a free income stream.
Protective Puts
Buying a put against shares held, which caps the loss below the strike. The protection is real and it is paid for, repeatedly.
Assignment and Exercise
Exercise is the holder's action; assignment is what happens to a seller. Both convert an option into a position in the underlying, sometimes unexpectedly.
Futures Contracts
A standardised agreement to transact at a set price on a future date. Unlike an option, both parties are obliged, and the exposure is the full contract value.