While the factors explained in this tutorial can explain much of an option's observable price behavior, supply and demand still play an important part and can (and do) override predictive option values created by using pricing models. A sustained imbalance of competing bids and offers can drive prices away from theoretically expected values.
Imbalances can be caused by factors such as a sudden political event or unexpected news regarding a particular stock. These factors cannot be quantified, and can have an effect on both option prices and the accuracy of price modeling. That being said, theoretical options pricing is a valuable tool that helps investors and traders anticipate price movements for option positions.
Understanding options pricing and the different analytic models available to shape your trading plan is an important part of trading carefully and intelligently. Try these techniques out in simulated situations and make sure you are comfortable with them before risking real money in the market.
Important Caution
Options involve risks and are not suitable for everyone. Option trading can be speculative in nature and carry substantial risk of loss. Invest only with risk capital or money that you can afford to lose. None of the information in this tutorial should be construed as a recommendation to buy or sell a particular security or to provide investment advice.
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Getting acquainted with options trading
Learn about trading stock options, including some basic options trading terminology. -
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Learn the top three risks and how they can affect you on either side of an options trade.