Open an account and place your trade Identify the market you want to trade There are a range of markets available to you when trading options, including forex, commodities and indices.
Most of them are weekly or monthly. You can read more about how to shape your options strategy in this article, which looks at the best options trading strategies and tips.
Consider your risk profile Your risk profile relates directly to the strike price when trading options. Learn more about the Greeks in options trading Implied volatility is another important factor when considering the risk of an option.
In options trading, implied volatility gives an approximate value to the expected volatility of an options contract based on current price changes.
Options that are at the money, meaning they could expire with a value or worthless, are the most susceptible to changes in implied volatility.
On the other hand, options that are in the money, meaning the options contract already has a worth, are less susceptible to the effects of implied volatility.
The same is true for options that are out of the money, meaning an options contract without a worth. This could help you to determine why market prices are currently the way they option price is the strike price of the option, and get an indication of whether your option is likely to be profitable.
Article Reviewed on July 30, Michael J Boyle Updated July 30, As you learn about trading optionsyou'll find that options traders use terms that are unique to options markets. You'll see these terms appear often and understanding them can have a significant effect on your chances for profitability on an options trade. Defining Options Before getting into options terminology, it's helpful to get some background on options themselves.
For one, there are two types of value assigned to an option: intrinsic value and time value. Intrinsic value is the inherent value that an options contract has, calculated as the difference between the current price of the underlying asset and the strike price of the option Time value is an additional amount of money that the buyer of an option is willing to pay over the option price is the strike price of the option value — which they would do if they believe the option will increase in value before its expiry The intrinsic value only applies to options that are in the money, because out of the money or at the money options by definition do not have an inherent value.
Time value is calculated as the option premium minus the intrinsic value, and the option premium is the intrinsic value plus the time value. Investors and traders with a low risk tolerance might choose a strike price that is close to or at the underlying market price, while those with a higher risk appetite might choose a strike price that is further away from the underlying market price.
Options with a strike that is further away from the underlying market price will often have a higher pay-out if the position turns profitable.
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The Bottom Line The strike price of an option is the price at which a put or call option can be exercised. It is also known as the exercise price. Picking the strike price is one of two key decisions the other being time to expiration an investor or trader must make when selecting a specific option. The strike price has an enormous bearing on how your option trade will play out.
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