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Understanding Stock Trading Options Terminologies

Could you earn money from the stock market no matter what direction is it?

Yes of course, utilizing Options and intraday trading tips, you can earn a profit in downside, upside or sideway market. This article contains information about how to invest and trade option with low risk regardless the market direction depending on the different values associated with it.

You can implement the strategies explained below to earn money from upside and downside market and also the market that trades sideway in online stock trading options.

Theta Value

Theta value: Theta value is a negative value, which shows the decay of the option time value. Option, which has longer time to expiry, has lower absolute theta value than option, which has shorter time to expiry. High absolute theta value means the option time value decays more than the low absolute theta value option. A theta value of -0.0125 means that the option will lose ₹0.0125 in its premium after passage of seven days. Options with a low absolute theta value are more preferable for purchase than those with high absolute theta value.

Gamma Value

Gamma value: Gamma value shows the change of the delta value of an option when the security price increases or decreases. For an example, gamma value of 0.03 is derived from the delta value of the option and it will increase 0.03 when the security price goes up in accordance to ₹ 1. Option, which has longer time to expiry, has lower value of gamma than option, which has shorter time to expiry. The gamma value also changes significantly when the security price moves near the option strike price.

Vega Value

Vega value: Vega value shows the change of the value of option for one percent increase in implied volatility. This value is always positive. Near the money option has higher vega value compared to in the money and out of the money option. Option, which has longer time to expiry, has higher vega value than the option, which has shorter time to expiry. Since vega value measures the sensitivity of the option to the change of the security volatility, higher vega value options are more preferable for purchase than those with low vega value.

Implied volatility

Implied volatility: Implied volatility is a theoretical value in stock trading option, which is used to represent the volatility of a security price. It is calculated by substituting actual option price, security price, option strike price and the option expiration date into the Black-Scholes equation. Options with a high volatility stocks are cost more than those with low volatility. This is because high volatility stock option has a greater chance to become in the money option before its expiration date. Most purchasers prefer high volatility stock options than the low volatility stock options. Here, you can download online stock trading app 

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