We will discuss more about the basic terminologies used for options trading in this article. If you are a beginner to this, make sure you grasp a good understanding of these terms related to option pricing.
The intrinsic value of an option is a representation of the underlying security in relation to the strike prices of the option. Its intrinsic value is the amount by which it is In-the-Money. (Note: In-the-Money refers to call options with a strike price belowput options with a strike price above the current stock price. This is also the amount of intrinsic value of the option - the amount that would be received if exercised immediately.)
Let us relate a simple example: If you buy call options and the underlying stock price increase, the intrinsic value of your call options will also increase.
Also, please understand that the volatility of the option price is a representation of the historical and implied volatility in the stock market and refers to the movement in the price of a security as a function of time.
For example, if a stock moves $1 in one day, it is more volatile than a stock that moves $1 in one week. For the benefit of this higher relative volatility, we must pay a higher price for the associated options.
"Open interest" refers to the numbers of outstanding contracts of a particular option. This number will give you a good indicator of the liquidity of the option.
Knowing the open interest of an option being considered for trade is critical!
So allow us to share with you the rule concerning open interest:
Do not invest more than 10% of the open interest.
Our course offers more comprehensive education for "options beginner" as well as more advanced trading strategies for traders who want to increase their investments profits with options trading.
About Wealth Mentors: Aaron Sim is the CEO of Wealth Mentors. Aaron let go of a 6-figure job as Finance Director of Unisys Singapore to start his coaching and training business. In just 4 years, his business has gone from zero to a successful S$10 million operation. Aaron is Mirriam MacWilliam's first protege in Asia and is now a successful options trader. He is a CPA by training and has been featured in the Sunday Times, Star, The Standard and Shang Hai magazine.
Mirriam MacWilliams is a self-made millionaire. She is a well-respected options trader and takes pride in helping people make money from trading options. She is also the former National Director of Education of the largest non-profit investment club in US and the Chief Options Trainer of Wealth Mentors. Mirriam has developed a step by step options trading course that has been time-tested and proven to help you consistently generate massive profits using options trading, even if you are a complete newbie. You can visit Wealth Mentors to learn more about options trading.
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