Options pricing – a little deeper

Getting a bit mathematical now. When pricing an option, we are attempting to put a value on the probability of future price movements. So we are now terribly interested in the mean and standard deviation of an underlyings price movements. The mean is the average price movement, whilst the standard deviation tells us how far the price moved. Using these figures (& volatility which is a measure of how fast the price is expected to move), we can model the distribution of expected price movements. Of course, expected is not the same thing as actual; which always makes things a …

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Basic Option Trading Strategies

Two basic trading strategies for Options – Speculation & Insurance/Hedging. Remember the characteristics of an option. Buying a call or put option contract over a stock, gives you the right to buy (call) or sell (put) 100 shares of the underlying stock, at a certain price, on or before a set date in the future. Speculation So if you believe that a stock will rise in the future, instead of purchasing the stock, you can purchase a call option (I prefer long term options for this strategy). Why do this? Let’s walk through an example. Say AAPL is trading at …

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