1. State your Forecast – important to be specific about price of stock and time frame e.g. XXX stock will rise from $10 to $15 in 20 days. Today is 40 days to expiration. 2. Calculate the Implied Volatility – volatility percentage in the option pricing formula – Stock price – Strike price – Dividends…
Option Price Behaviour
1. Strike Price – if the stock price don’t move beyond the strike price, then the option will expire worthless 2. Time to Expiration (time decay) – the longer the time, the higher the option price – the most time decay happens as option is near expiry 3. Effect of Interest Rate on short- term options prices…
Option Strategy – Long Stock; Stock UP/ DOWN since Purchase – what next?
Long Stock, Stock UP since purchase Next steps 1. Take no action – monitor price and change strategy if price outlook sours 2. If want to sell at my Target Price –> write Covered Calls – look for Strikes = stock target price, short time to expiration, high option premium –…
“Best” Option Strategy for each Implied Volatility rank
Implied Volatility percentile Strategy Net Buyer 0 to 50 Debit Spread Calendar Spread Ratio Spread Diagonals Net Seller 50 to 70 Credit Spread Iron Condor Broken wings butterfly Net Seller 70 to 100 Straddle Strangle Wide iron butterfly Place trades at ~ 45 days to expiration, sell at ~15 days to expiration 25 – 40…
Stock Picking Template
Income Statement 1. Net Profit Margin for the past 10 years – look out for – non- recurring earnings – reserves – subsidiary earnings …