The Importance of Time Value in Options Trading

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A call optionoften simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option. The seller or "writer" is obligated to sell the commodity or financial instrument to the buyer if the buyer so decides.

The buyer pays a fee called a premium for this right. The term "call" comes from the fact that the owner has the right to "call the stock away" from the seller. Option values vary with the value of the underlying stock option trading time over time. The price of the call contract must reflect stock option trading time "likelihood" or chance of stock option trading time call finishing in-the-money.

The call contract price generally will be higher when the contract has more time to expire except in cases when a significant dividend is present and when the underlying financial instrument shows more volatility.

Determining this value is one of the central functions of financial mathematics. The most common method used is the Black—Scholes formula.

Importantly, the Black-Scholes formula provides an estimate of the price of European-style options. Adjustment to Call Option: When a call option is in-the-money i. Some of them are as follows:. Similarly if the buyer is making loss on stock option trading time position i.

Trading options involves a constant monitoring of the option value, which is affected by the following factors:. Moreover, the dependence of the option value to price, volatility and time is not linear — which makes the analysis even more complex. From Wikipedia, the free encyclopedia. This article is about financial options. For call options in general, see Option law. Stock option trading time article needs additional citations for verification. Please help improve this article by adding citations to reliable sources.

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Without question, the best time for trading is the first and last half hour the market is open. Those two half hours of every day are packed with tradable action. The primary ingredient for successful trading is volatility. The market has to move for traders to make money. During these times, the spread between bid and ask prices is at its largest , leaving more of an opening for traders. Many skilled traders stop trading at around They return for the last hour of trading when volatility picks up once again.

This adjustment period offers traders a window of opportunity to capitalize on the momentum that certain stocks will have following news. These stocks are typically some of the largest movers when the market opens. The uptick in volatility during the closing hour also makes sense. Traders who want to exit positions prior to the end of the day will be selling. Traders looking to take a long or short position in a stock ahead of an after-hours catalyst like an earnings report will also be trading in the last few minutes of the day.

In addition, stocks that have been big movers throughout the trading day often gain momentum right before the closing bell or reverse direction sharply due to profit-taking. Finally, portfolio rebalancing also typically takes place at the end of the day, although it is more prevalent at the end of the week, month or quarter than on a typical weekday. Professional and institutional traders are well aware that the first and last half hours of the trading day are the best times to trade, so there are plenty of sharks in the water.

These trading hours offer experienced traders the best opportunity to make money trading, but they can also be a dangerous time for inexperienced traders. Novice traders may want to consider starting off by trading in the middle of the day when there is less market volatility and mistakes and learning experiences can typically be made at a lower cost.

This article is provided for educational purposes only and is not considered to be a recommendation or endorsement of any trading strategy. The author is not affiliated with Lightspeed Trading and the content and perspective is solely attributed to the author. Navigating Taxes as an Active Trader. Large Cap Momentum Trading.

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