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It is very important to calculate the risk and reward of short-term options. This is the amount that would be at risk if they were wrong and the amount you would if you were right. If you do not understand this number is possible that people can go in your favor, but the choice is contrary you.
There are several reasons why the option can lose value if the stock goes in the same direction as you predict. Market volatility could be heading down the option this fall. Volatility makes much of the option. The higher the volatility, the higher the option price be. If the choice is affected.
Value of time can also be a reason why you can lose money in options. As time time passes the value of an option will begin to erode. This is particularly true for short-term options that expire in a few weeks.
If you want to calculate the potential risk to reward the first to be heard at least one value option called intrinsic value. It's the difference between the purchase price of shares and the exercise price of the option.
For example, if a stock is trading at intrinsic value of $ 40 or $ 35 call is worth at least $ 5. Knowing this can be extremely useful. Here's how you can use.
We will say the option of $ 35 is worth $ 8 for the same population. We expect the stock to run up $ 51. $ 51 – $ 35 $ 16 option is at least worth $ 16 if we are right. In this case, the reward of this trade would be at least 16 $ – $ 8 or $ 8.
Now they say they wanted to set the option with a break of $ 4. This means that if the option is reduced to $ 4, who will leave the profession. To obtain a ratio of 1.2 the risk of a reward in the population. That means you do if you have $ 2 reason and only lose $ 1 if you're wrong.
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