After completing the Getting Started section, you should understand:
- Stock option fundamentals.
- LEAPS® specifications and strategies.
- What factors contribute to an option's value.
- How to establish an options account.
- What your broker may require to approve you for options trading.
Like equity options, index options allow an investor to capitalize on an expected market move or to protect holdings in the underlying instruments. The underlying instruments of index options are indexes. These indexes reflect the characteristics of either the broad equity market as a whole or specific industry sectors within the marketplace
Understanding Option Greeks
Option Greeks are outputs from theoretical pricing models that attempt to estimate how option premiums may change. Looking at Greeks is one way investors attempt to predict how much an option will be worth as the market moves, time passes and other inputs to the pricing model are modified. Having a better idea of how the premiums may change may help investors to pick the right strategy for a certain environment or forecast for the underlying.
In this section, we will take an in-depth look at some of the more commonly used Greeks. We hope to show investors how premium changes are expressed using Greeks, how the Greeks are interrelated and how results are always changing during market hours.
Volatility & the Greeks
Volatility can be a very important factor in deciding what kind of options to buy or sell. Volatility reflects the range that a stock’s price has fluctuated in a certain period.
The Greeks are a collection of statistical values that give the investor a better overall view of how option premiums might change. These statistical values can be helpful in deciding what options strategies are best to use.
Put/call parity is a captivating, noticeable reality in the options markets. Put/call parity helps investors understand some mechanics that professional traders use to value options. This includes how supply and demand impacts option prices and how all option values (at all the available strikes and expirations) on the same underlying security are related.
The Black-Scholes formula was the first widely used model for option pricing. Strategists can use this formula to calculate a theoretical value for an option using current stock prices, expected dividends, the option’s strike price, expected interest rates, time to expiration and expected stock volatility.
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