Monday, 19 February 2018

Trading Weekly Options – Basic Terms to Create Your Income

Important Basic Terms of Weekly Option Trading

  • By gaining an understanding of the weekly's, you can create a monthly income as well as a weekly income. One way of creating this income is by selling an option, thereby collecting a premium. Another one will be purchased for protection.
  • These are commonly known as credit spreads.
  • Credit spreads can be done with calls and puts. A combination of both can be used to construct an Iron Condor trade as well. Other income strategies are possible, however, these are some basics that work well.
  • These strategies will be explored in further articles. Until then, I want to review a few of the basic terms that we should be familiar with.
  • A call option gives one the right to buy the underlying asset.
  • A put gives one the right to sell the undering asset.
  • The expiration date is the date that the contract ends. Weekly options expire every week.
  • When an option has intrinsic value, it is called in-the-money. A call option is in-the-money if the undering asset is higher than the price of the option price. The put is in-the-money if the undering asset is lower than the option price.
  • When an option has no intrinsic value, it is said to be out-of-the-money. The call option is out-of-the-money if the trading price is lower than the strike price. The put option is out-of-the-money if the trading price is higher than the strike price.
  • One of the key terms as a weekly option trader is Option Writing. An option writer is the Seller of the Option. This is one way in which income is created. By selling an option we collect a certain amount of money for this transaction.
  • Option buyer – is one who obtains the rights to buy the transfer the option.
  • Strike Price – Options have various strike prices. For instance, if the undering asset is the NDX and it is trading at 857, there will be options with different strike prices. In the NDX market there are usually 10 point increments. So in the above example, there would be a put option with a strike price of 850 and 825.
  • The amount of money that is collected by selling an option is called the Premium. There are many factors that effect the premium such as volatility and the strike price of the option. Another factor that effects the amount of premium we collect is the length of time until expiration.

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