Muinalis way of learning how to trade options

Mr Amrutkumar
Asked about stock option pricing
http://www.traderji.com/options/77331-stock-option-pricing.html

Let me attempt to clear " Stock Option Pricing"
There are two component in price of any option
(a.)Intrinsic value
(b.)Time value
When thinking about an option's total price (intrinsic value and time value), it's a good idea to remember that options are derivatives. This just means that an option's price will change as the underlying stock, or index changes their price.

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*Intrinsic value is the amount of an option's price that is in-the-money.The remaining value is time value.
Keep in mind that out-of-the-money option prices are solely based on time value.

For a call option: Intrinsic Value = Spot Price - Strike Price
For a put option: Intrinsic Value = Strike Price - Spot Price
**Time value is the amount option buyers are willing to pay for the possibility that the option may become profitable prior to expiration due to favorable change in the price of the underlying. An option loses its time value as its expiration date nears. At expiration, an option is worth only its intrinsic value. Time value cannot be negative.

example- lets nifty spot trading @5850 while stricke price of 5800 CE trading @60
so intrinsic value is 5850-5800=50 , now remaining 10 is time value

Re: Learn The Basics Of Options Trading!

Good luck with your thread as most what you think you have to post is already posted in the past in this forum and in some very specific threads.

So be very specific with your post and do not past copy any subject.

Other wise I will you remain about it at any time. Hope you got the point.

DanPickUp

Re: Learn The Basics Of Options Trading!

Time value is the additional premium that is priced into an option, which represents the amount of time left until expiration. The price of time is influenced by various factors, such as time until expiration, stock price, strike price and interest rates, but none of these is as significant as implied volatility.

Re: Learn The Basics Of Options Trading!

bro
as i told you i am trying to be a directional option trader initially that is risky one i know what i undersood reading different threads and webside. here i am keeping all my requirement together which i think synchronize my knowlege .My intention is to make money from option and improve my trading day by day, neither i am expirt in option trading like other here in forum nor educating readers but may be usefull to any one. If i feel any thing important already posted or material availble readymade in other site ,i dont mind to copy paste here with writer name and link.
i know most of thread here are same thing in differnt words already available.The thing is all this should understood by me firstly.
neither i am going to post strategical option trading basics nor their 101 strategy for trader.
so be calm and i know you are first in queue to answer my query because
it is more kind of "trade journal"

OMG my thread has placed here and ...............renamed very fast .funny............!
now hope no-one have objection to be explore here........!
ok ,anyway adding something

resreved place for further instrument

now question ,
What Is Implied Volatility?
ans>
Volatility:
The degree to which the price of an underlying stock or index tends to fluctuate over time.

Implied volatility (IV):
*The expected volatility of a stock over the life of the option.
**a volatility consensus among all market participants with respect to the expected amount of underlying price fluctuation over the remaining life of an option.
***Thus, IV attempts to predict to future volatility

Historical volatility (HV):
*This is the actual volatility of the underlying.
**Thus, this is a record of what has already occurred.
*** Historical Volatility is a measure of price fluctuation over time. Historical volatility uses historical (daily, weekly, monthly, quarterly, and yearly) price data to empirically measure the volatility of a market or instrument in the past. The value rendered by a historical volatility study is the standard deviation of bar-to-bar price differences.

Importance of Implied volatility
If you look at an option-pricing formula, you’d see variables like current stock price, strike price, days until expiration, interest rates, dividends and implied volatility, which are used to determine the option’s price.

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But for now, let’s stay focused on the implied volatility of the at-the-money option contract for the expiration month you’re planning to trade. Because it’s typically the most heavily traded contract, the at-the-money option will be the primary reflection of what the marketplace expects the underlying stock to do in the future

* Implied volatility represents the expected volatility of a stock over the life of the option. As expectations change, option premiums react appropriately. Implied volatility is directly influenced by the supply and demand of the underlying options and by the market's expectation of the share price's direction. As expectations rise, or as the demand for an option increases, implied volatility will rise. Options that have high levels of implied volatility will result in high-priced option premiums. Conversely, as the market's
expectations decrease, or demand for an option diminishes, implied volatility will decrease. Options containing lower levels of implied volatility will result in cheaper option prices. This is important because the rise and fall of implied volatility will determine how expensive or cheap time value is to the option.

** Each listed option has a unique sensitivity to implied volatility changes. For example, short-dated options will be less sensitive to implied volatility, while long-dated options will be more sensitive. This is based on the fact that long-dated options have more time value priced into them, while short-dated options have less.

*** Also consider that each strike price will respond differently to implied volatility changes. Options with strike prices that are near the money are most sensitive to implied volatility changes, while options that are further in the money or out of the money will be less sensitive to implied volatility changes. An option's sensitivity to implied volatility changes can be determined by Vega - an option Greek. Keep in mind that as the stock's price fluctuates and as the time until expiration passes, Vega values increase or decrease, depending on these changes. This means that an option can become more or less sensitive to implied volatility changes.

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sources:http://www.strategic-options-trading.com/
http://www.investopedia.com/
http://www.optionsplaybook.com/

How Implied Volatility Affects Options
Some traders mistakenly believe that volatility is based on a directional trend in the stock price. Not so. By definition, volatility is simply the amount the stock price fluctuates, without regard for direction.

As an individual trader, you really only need to concern yourself with two forms of volatility: historical volatility and implied volatility

Even if a $ 100 stock winds up at exactly $ 100 one year from now, it still could have a great deal of historical volatility. After all, it’s certainly conceivable that the stock could have traded as high as $ 175 or as low as $ 25 at some point. And if there were wide daily price ranges throughout the year, it would indeed be considered a historically volatile stock.

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Implied volatility isn’t based on historical pricing data on the stock. Instead, it’s what the marketplace is “implying” the volatility of the stock will be in the future, based on price changes in an option.
Implied volatility is expressed as a percentage of the stock price, indicating a one standard deviation move over the course of a year. For those of you who snoozed through Statistics 101, a stock should end up within one standard deviation of its original price 68% of the time during the upcoming 12 months. It will end up within two standard deviations 95% of the time and within three standard deviations 99% of the time.

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Let's focus on the one standard deviation move, which you can think of as a dividing line between “probable” and “not-so-probable.”
For example, imagine stock XYZ is trading at $50, and the implied volatility of an option contract is 20%. This implies there’s a consensus in the marketplace that a one standard deviation move over the next 12 months will be plus or minus $10 (since 20% of the $50 stock price equals $10).
So here’s what it all boils down to: the marketplace thinks there’s a 68% chance at the end of one year that XYZ will wind up somewhere between $40 and $60.

By extension, that also means there’s only a 32% chance the stock will be outside this range. 16% of the time it should be above $60, and 16% of the time it should be below $40.

Obviously, knowing the probability of the underlying stock finishing within a certain range at expiration is very important when determining what options you want to buy or sell

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