What Makes a Stock Option's Price Move?
We've talked about what call & put options are and how to use them...
now I want to break down what the 4 factors are that cause the price of an option to move.
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The 4 Factors that Affect Option Price
1. Type of Option - Call or Put
We use call options when we believe a stock is going to go up. When the price goes up on a call option, it influences the price in a positive direction.
What about a put option? That means we believe a stock is going to go down. So even when the price of the stock is falling...when you use a put options, it's going to have a positive effect on your stock price.
2. Price of the Stock - Current Price it's Trading at
Remember, an option is just a derivative (or contract) to be able to buy a stock at a certain price.
What does that mean for the option? The price of the stock, whether it's going up or down, is going to change the price of what the option is currently selling for and what it will sell for in the future.
3. Strike Price - The Price an Option Can be Exercised at
The strike price is the agreed upon price that you can buy a stock for.
Let's look at an example: if a stock is going for $100 and you have a strike price where you've agreed to buy it for $105, it won't be worth that much.
But let's say the stock shoots up to $120...that $105 strike price is now going to have a $15 positive affect on your option.
4. Time - Expiration Date of Your Option
The fourth component that makes a stock move is time...
Meaning, how much time do you have for the option to do what you think it's going to do?
Call option? You need enough time for that stock to move up past your strike price.
It works the same way with a put option. You need enough time for the stock to move through or past your strike price.
The importance of the time component when trading options is pretty crucial.
You've got to make sure you're giving your option enough time to do what you want it to do before expiration.
Take a Look at What I'm Covering in Today's Episode
Check Out the Money Mondays: Options Series
Learn to Trade Options - Click here
Call Options Explained - Click Here
Put Options Basics - Click Here
What Are Options Spreads - Click Here
Top 10 Options Trading Questions - Click Here
