Best Stock Options To Buy - How Best to Predict the Value of Stock Options

Best Stock Options To Buy

Best Stock Options To Buy

If you want to discover how to master stock option valuation, then this article is for you. Among all the concepts regarding options trading that you will learn, options valuation is probably the most difficult to understand. Most traders resort to using formulas when asked to value an option, due to its complexity. In this article I have done my best to break it into a step by step process so that you can follow easily. Best Stock Options To Buy

Stock option valuation is also popularly known as options pricing. What you need to understand is that this branch of the stock market trading is quite different from trading normal shares. This is obviously due to some of the intrinsic, unique properties that options have that make them so different from shares. As a consequence, your profitability of trading will be heavily influenced by these properties.

Factors That Affect Value of a Stock Option

There are at least six (6) different properties that affect the value of an option that we need to understand.

These factors are:

(1) The Current Market Price of the Underlying Stock,

(2) The Remaining Life of the Option,

(3) The Strike Price of the Option,

(4) Market Volatility,

(5) Stock Dividends, and

(6) Interest Rates.

It must be stated that the last two factors, stock dividends and interest rates, are beyond the scope and purpose of this article. As such we will focus our discussion on the first four factors. Best Stock Options To Buy

Having said that we need to understand these couple of terms that are commonly used by traders before we can proceed.

Firstly, premium, also called the strike price. This is the amount of money you need to pay to acquire an option; literally the lock in the price of the option. Secondly, Puts and Calls. Simply, a Put gives the trader the right, but not the obligation, to sell the stock option. Conversely, a Call gives the trader the right to buy the option.

The Current Market Price of the Underlying Asset

The value of each stock option is affected by the current market price of the underlying instrument. Therefore, when the price or value of the stock appreciates, the Call option premium will increase as a result. Conversely, the Put premium will decrease.

On the other hand, if the value of the underlying instrument decreases, (mostly price decreases), the call premium will decrease and the put premium increases. In a nutshell, the call or put premiums follow directly, the movement of the value of the underlying commodity being traded.

It is recommended that you buy Call options when you think that the price of an a stock will appreciate and buy Put options when you think that the price of the stock will go down.

In conclusion, all of the six factors listed above, affect the value of an option. However, as a trader or investor, there are only two of these factors that you have total control over. These are the strike price and the remaining life of the option (or date of expiry of the option).

So there you have it. The more accurately you can determine the value of a stock option, the better your chances are of good investment decisions which will eventually affect your overall gains. Best Stock Options To Buy

Best Stock Options To Buy - How Best to Predict the Value of Stock Options

By: Trading Expert

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