Watch These Three Videos to Master 80% of Options Trading
Oct 8, 2023
Options give traders many variables to leverage. From time to volatility to price, understanding these variables can be the difference between consistent profits and a struggling portfolio.
Intrinsic value refers to the real value of an option to the holder at expiration, which is directly related to the stock price and the option strike price. Options with intrinsic value are considered "in the money." Extrinsic value, on the other hand, is the premium value associated with an option based on its implied volatility and time value. It tends to decrease as the options approach expiration.
Intrinsic value can be calculated by subtracting the strike price from the stock price for calls, and vice versa for puts. Extrinsic value can be determined by looking at the corresponding out-of-the-money options.
In-the-money options have both intrinsic and extrinsic value. Out-of-the-money options have only extrinsic value, which represents the time value and implied volatility. With those variables in mind, selling options is attractive because extrinsic value decays over time, providing opportunities for traders to profit.
To truly understand options pricing, a wise trader would watch the three videos below.
Dr. Jim Schultz has a PhD in finance from the University of Memphis and a passion for teaching the nuances of options pricing. His crash course is the best place on the internet to reach an understanding of how to leverage extrinsic value, intrinsic value, option greeks and selling premium.
The Pareto principle states that 80% of outcomes are a function of only 20% of inputs. Options trading may feel like an overwhelming feat, but in Mike Butler’s eyes, the easiest place to start is by developing an understanding extrinsic value. To understand why options pricing is the backbone of tastylive options trading mechanics, watch Mike’s full live talk above.
Once you understand the value of options pricing and have the key to options trading success (extrinsic value), it’s time to put it into practice. Liz Dierking and Jenny Andrews put together a fast and insightful 6-minute walkthrough on the tastytrade platform for setting up a successful trade using extrinsic value as a guide.
Eric Villa is a YouTube specialist at tastylive.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
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