How are options contracts valued?
The valuation of an option contract can essentially be considered as a probabilistic prediction of future price changes of the underlying asset.
1. Probability
When the probability of the estimated situation occurring is high, the valuation of the option contract will naturally increase. For example, the value of a call option will increase as the underlying stock rises. In this way, the value of the option contract can, to a certain extent, become a reference item for judging stock market conditions.
2. Duration
As an option contract approaches its expiration date, its value will gradually decrease. This is because the time for the underlying asset to change in value is limited, and the room for change will gradually decrease. The possibility of making a profit through a high price difference will decrease. Therefore, the value of an option contract that expires in one year will be higher than that of an option contract that expires in one month.
3. Fluctuation Range
Large fluctuations are what investors are willing to see but are also afraid of seeing. Large fluctuations in a favorable direction mean increased profits, while large fluctuations in a negative direction mean increased losses.
For buyers of option contracts, due to the existence of a two-way trading model, large fluctuations mean an expansion of profit margins. Therefore, the greater the volatility, the greater the value of the option contract.
How to play options? What are the strategies for options trading?
Below are some common options trading strategies , among which the most used by investors are call options and put options .
Buying a long call option : Thinking that the stock price will rise, buy a call option to gain profit when the price rises.
Long put : Believe that the stock price will fall, buy a put option to gain profit when the price falls.
Selling a short call option : Holding a stock and expecting the price to remain stable or rise slightly, sell a call option to earn the option fee.
Selling a put option (Short put) : Hoping to buy a stock and expecting the price to remain stable or rise slightly, sell a put option to earn the option fee and buy the stock at the strike price when the option expires.
Protective put : Holding a stock and worrying about a drop in price, buy a put option to protect your investment.
Iron butterfly strategy : Buying a call option and a put option at the same time, and selling two call and put options with a strike price slightly lower or slightly higher, in the expectation that the stock price will remain stable.
