Ken McLinton
There is really nothing to worry about here since based on actual figures only 17% end up exercising their options. 48% close them out before expiry while the remaining 35% just allowed their options to expire. As a writer of covered calls you will be like a landlord collecting rent from various tenants –the option takers. (Location 265)
The more volume there is the more liquid the instrument will be meaning your chances of getting in and out of the higher volume option is better than those with lower volumes of trades. (Location 419)
An option has an intrinsic value and a time value. The sum of these two values add-up to be the option premium. (Location 445)
An option’s intrinsic value is the difference between the strike price and the most current price of the underlying asset in the spot market (spot price). The intrinsic value of a call option is computed differently from that of a put option. (Location 449)
Time Value (also known as Extrinsic Value) Options are basically ‘decaying’ assets meaning they lose their value as expiration nears and goes completely zero value on expiry. The time value represents the change in an option's price relative to the decrease in time going to expiration. The cycle is called time value decay because it declines exponentially with time, reaching zero at the expiration date. It is defined as the option premium minus the intrinsic value. It is that part of the premium which represents the amount that you actually pay the option seller for the possibility that it will be worth more in the future. Upon expiration, if the option is still out of the money, the option will have no value left, and it will expire worthless. (Location 460)
Don’t get intimidated by implied volatility – it simply represents the demand for the option or the market’s anticipation on when the underlying asset is going to make a big move. (Location 478)
They however contain the largest dollar amount of time value (extrinsic value) among the three. (Location 510)
If you are wondering whether out-of-the-money options have any trading value at all, the answer is simple. They are relatively cheaper than in-the-money or at-the-money options and therefore they offer the best leverage or the biggest bang for or your money if your view of the market turns out to be correct. (Location 524)
Here are the various situations why you ought to buy call options: (Location 555)
The most prudent (Location 566)
way is to cash in on your profits and sell the valued asset at the same time buy the corresponding amount of option to retain your exposure on the asset. This way, if the Bull Run continues you still are able to take advantage of it. (Location 566)
There are three ways you can settle you bought. (Location 571)
Why would traders buy put options? People who have previously bought the underlying asset are often the ones who buy put options. Being long on the underlying asset, they are at risk if the price changes direction and start to decline. (Location 589)
Buying put option is less risky than selling the actual asset. If the decline proves to be temporary and starts rising again, you would have missed this chance if you already sold the actual asset. Buying put options is even better than actually short selling the asset because in short selling, you will have to borrow the asset from those who have them before you can sell them and pay a fee for that plus commissions. (Location 596)
Selling a call option (or Writing a Call) is normally the option strategy use by those who have a very bearish outlook on the underlying asset. Writing a call option is done mainly by traders who generally believe that the call option will remain out-of-the-money until expiry and therefore they expect that the option will never be exercised by the buyer. Call option writers do it for one reason only – to collect a premium and which is actually all they will get from it. (Location 605)