While there are many factors that determine option prices, stock option premiums move in unison with the underlying stock price. The most popular method for determining option value is the Black-Scholes Model. There are six factors in this model:
There are other forces that can affect the price of options that are not included in the Black-Scholes model such as:
- Supply and demand for the stock
- Liquidity or volume of the option
- Markets expectation of future events such as earnings, etc.
- Markets expectation of future price direction of the stock
I have created an investment that achieves higher monthly returns while managing stock risks in the trade. You may be skeptical of this concept and should be when you hear something like this introduced into your trading plan. To explain, let’s look at what must happen to a stock price for a successful PUT selling trade. To keep the premium from the PUT sell, the stock price must be above the PUT option strike price at expiration. To increase my percent of winning PUT trades, I invest in stocks with price momentum moving higher. This increases the probability of the stock price closing above the strike price – giving us more winning trades.
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