Using Fundamental Analysis To Screen For Option-Selling Stocks
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How does an option work? And how is it valued? Here are some fundamentals. Let's play a game. If not, I pay nothing. We can play as many times as you'd like. I have just offered you an option. 166 option fundamental you play and things don't turn out well tails on either flipyou walk away. What is the value of the option? You should make money. What is a financial option?
It's a bet on a financial asset -- a contract under which one person promises to sell or buy a designated financial asset at a specified price at a specified time, if the other person exercises the option to buy or 166 option fundamental.
For the person who buys the option pays the "premium"it's a relatively cheap way to take advantage of At the same time, you don't want to buy shares of the company. An option is a financial contract that represents the right, but not 166 option fundamental obligation, to buy or sell a specified amount of an underlying security at a specified price at a specified time.
Think of an option as a "lottery ticket" - cash in the ticket if your number comes up, toss the ticket if not. Options can be written by the company that itself has issued the underlying asset, such as common stock. If the option is written issued by the company it is called a warrant. With options, the contract is between two removed individuals with no involvement of the company.
How much should you sell or write the option for? But if it falls, you're golden. 166 option fundamental value the option, let's imagine 166 option fundamental you "hedge" your position by buying stock. In this way, you will own the stock if the options you sell are exercised when the stock price rises. And if the stock price declines, you'll have received the payments for the options to offset the price decline. Either way, you'll want to be in the same financial position.
Here's the tricky question: How many shares must you buy and how many options must you sell to be hedged? This can be calculated by computing the ratio of the spread of option value to spread of stock value This means that writing three call options going short and buying two shares of stock going long will be financially identical.
Now we can value the option - C o. The option value can be computed 166 option fundamental calculating the ratio of calls short to shares long and then take into account the effect of borrowing to create the hedge. The law of contracts has often treated options quite differently from other contractual transactions; for example, the characterization of a transaction as an option contract calls forth specially required formalities, but on the other hand often has the effect of releasing parties from doctrinal limitations on their contractual freedom, such as the duty to mitigate damages or the rule that holds excessively high liquidated damages void as penalties.
Such differential treatment is challenging to explain from a functional viewpoint, in part because all contracts resemble options to the extent they are enforceable in terms of monetary damages, and in part because contracts that are nominally structured as explicit options can be close economic substitutes for contracts that are nominally structured as unconditional.
This essay sets out a theoretical account of the efficient design of option contracts - one that explains how contracting parties should strike the balance among option premium, option life, and exercise price, in order to maximize the expected surplus from their transaction. It 166 option fundamental that 166 option fundamental tradeoffs between these various aspects of option contracts can affect the parties incentives to acquire and disclose information, to invest in relation-specific investments, and to take efficient precautions against the 166 option fundamental of breach.
It then goes on to develop an organizing framework for private parties choosing whether and how to structure their contractual arrangements as options, and for policymakers choosing whether or how to regulate such private choices.
In short, the appropriate balance between option premium, option life, and exercise price will depend on the relative importance that the one attaches to these various dimensions of incentives. Stock price at end of period. Option Nomenclature American Style Option. Option contract that can be exercised at any time before it expires. Option contract that can only be exercised at the expiration date. Curiously, most options traded on US 166 option fundamental are of this type.
Option with established profit cap. Capped options are automatically exercised when the underlying security closes at the preset cap price.
The 166 option fundamental of an option. This person receives premium, and is obligated to buy or sell the underlying security at a specified price, if called on to do so. Option contract giving the holder the right, not the obligation, to buy a shares of a particular stock, stock index, or futures at a specified price within a specified time. Contract that grants the right, not the obligation, to sell a specific 166 option fundamental of shares at a specific price by a specific date.
In essence, the option holder has the right to "put" the stock on the option writer if the stock price dips below the strike price. Price at which the stock or commodity underlying a call or put option can be purchased or sold over the specified period. For a call, the strike price of the 166 option fundamental is well below the current price of the underlying instrument. For 166 option fundamental put, the strike price of the option is well above the current price of the underlying instrument.
Refers to an option that if exercised would generate a profit. For a call, the strike price would be less than the market price, and for a put, the market price would be less than the strike price. Option with a strike price equal, or close to equal, the market price of the underlying security. Not in-the-money or out-of-the money, but exactly in the middle. In other words, the underlying security is trading at the strike price of the option.
Call option is out of the money if the strike price exceeds the price of the underlying security. The opposite is true for a put option. Price of the option; This is what the option holder pays for the right and the option writer gets for 166 option fundamental the option grants. Price of an option less its intrinsic value. For example, an option that is out-of-the-money consists of nothing but time value, or extrinsic value. Amount by which 166 option fundamental option is in-the-money.
For a call, this is the underlying asset's price less the strike price; for a put, this is the strike price less the underlying asset's price. Refers to a securities position that is not hedged from market risk. A naked position occurs when an investor writes a call or put without having a corresponding position on the underlying security. Option contract backed by the shares underlying the option. This is the opposite of a naked option.
Option contract not backed by the shares underlying the option. Also called a naked option. A game in which the losses of the losers are matched by the gains of the winners. Options trading is so called because for every trader holding a profitable contract there is another holding 166 option fundamental losing contract for the same amount. This page was last updated on: