We recommend reading this chapter on Varsity to learn more and understand the concepts in-depth.
Key takeaways from this chapter
- Buy a call option or sell a put option only when you expect the market to go up.
- Buy a put option or sell a call option only when you expect the market to go down
- The buyer of an option has unlimited profit potential and limited risk (to the extent of the premium paid)
- The seller of an option has an unlimited risk potential and limited reward (to the extent of the premium received)
- Majority of options traders prefer to trade options only to capture the variation in premiums
- Option premiums tend to gyrate drastically – as an options trader, and you can expect this to happen quite frequently.
- Premiums vary as a function of 4 forces called the Option Greeks
- Black & Sholes option pricing formula employs four forces as inputs to give out a price for the premium
- Markets control the Option Greeks and the Greek’s variation itself