To use this kind of strategy, sell a put and buy another put at a lower strike price (essentially, a put spread), and combine it by buying a call and selling a call at a higher strike price (a call spread). For iron condors, the position of the trade is non-directional, which means the asset (like a stock) can either go up or down - so, there is profit potential for a fairly wide range. With this strategy, the trader's risk can either be conservative or risky depending on their preference (which is a definite plus). But by using this strategy, you are actually protecting your investment from decreases in share price while giving yourself the opportunity to make money while the stock price is flat. However, you could lose money with this kind of trade if the stock price falls too much (but can actually still make money if it only falls a little bit). And, as you may have guessed, an option that is "out of the money" is one that won't have additional value because it is currently not in profit.Ĭovered calls can make you money when the stock price increases or stays pretty constant over the time of the option contract. On the other hand, if you have an option that is "at the money," the option is equal to the current stock price. If you are buying an option that is already "in the money" (meaning the option will immediately be in profit), its premium will have an extra cost because you can sell it immediately for a profit. Value: Time Value and in/at/out of the Money On the other hand, implied volatility is an estimation of the volatility of a stock (or security) in the future based on the market over the time of the option contract.
Historical volatility is a good measure of volatility since it measures how much a stock fluctuated day-to-day over a one-year period of time. When trading options on the stock market, stocks with high volatility (ones whose share prices fluctuate a lot) are more expensive than those with low volatility (although due to the erratic nature of the stock market, even low volatility stocks can become high volatility ones eventually). Options typically expire on Fridays with different time frames (for example, monthly, bi-monthly, quarterly, etc.). And, what's more important - any "out of the money" options (whether call or put options) are worthless at expiration (so you really want to have an "in the money" option when trading on the stock market).Īnother way to think of it is that call options are generally bullish, while put options are generally bearish. However, for put options (right to sell), the opposite is true - with strike prices below the current share price being considered "out of the money" and vice versa. ( AMZN) ) is $1,748, any strike price (the price of the call option) that is above that share price is considered to be "out of the money." Conversely, if the strike price is under the current share price of the stock, it's considered "in the money." For example, if a share of a given stock (like Amazon When buying a call option, the strike price of an option for a stock, for example, will be determined based on the current price of that stock. For starters, you can only buy or sell options through a brokerage like E*Trade