Selling otm put options

Selling otm put options

Posted: chipp Date of post: 21.07.2017

November 21, by Mike Butler. As traders, we use the term 'out of the money' a lot to reference the position of an option where the stock is trading at in relation to the strike price. For new traders, the term out of the money OTM can be pretty confusing. Rather than trying to just throw an overcomplicated definition at you and then leave you hanging, let's first explore the components that determine if a trade is out of the money or not.

That may be a little confusing so to clarify, let's take a look at a real world example. The above option is out of the money because the strike price of the option is higher than the stock's current price.

selling otm put options

If you were to buy or sell a call at a strike price below where the stock is currently trading, then the call option would be in the money. Now that we have covered out of the money call options, let's take a look at out of the money put options. A put option is out of the money when the strike price of the options is below the price that the stock is currently trading at.

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Let's take a look at another example just to give a visual of out of the money puts. After that, if you're a dough user, open up the platform and put on some mock trades with different strike prices using different underlyings. Drag the strike prices around to help you feel out in the money and out of the money. The buyer loses the debit that they paid for the trade and no stock changes hands.

The seller of a call option that expires out of the money gets to keep the credit they collected and no stock changes hands. Confused about what happens to your call options when it expires still?

There is a 'tool tip' section on dough's 'trade page' that allows you to see all of the possible scenarios that can play out with a trade at expiration. This means that if the stock price expires in that area below the strike price , the options cannot be exercised and I get to keep the credit I received when the trade was executed.

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This means that if the stock price expires in that area above the strike price , the options cannot be excercised and I get to keep the credit I received when the trade was executed. Extrinsic value is a slightly more difficult concept to understand when you are learning how to trade options.

I'm not going to go into detail in this post, but I will explain how extrinsic value relates to out of the money options. Unlike intrinsic value, there is no simple calculation to figure out the real monetary value of extrinsic value. Theta time value is non-linear, and volatility can change in a moments notice, so the value is truly intangible.

Out of the money options gain value as you move closer to the strike price. A seller of a call option may find this enticing, but it is important to note that the closer one moves to the strike price, the more risk they take on. See the image below for a visual, showing you the bell curve resemblance of extrinsic value diminishing as you move away from the stock price: This option will lose value as time goes by and as the stock price moves further away from the strike price.

As the option seller, I am taking on more risk as the stock price moves closer to my strike. If it goes past my strike, I may have to sell shares of the stock if it stays above my strike price at expiration. The out of the money call option increases in value as the stock price moves closer and as time passes.

You also now know that the buyer loses the debit they paid to place the trade and the seller gets to keep the credit when an option expires out of the money.

In part 3 of our liquidity series we go over strike price volume.

selling otm put options

The stock might be liquid, but is the strike price of the option you are trading? This week she is talking about IV Rank, see what questions the support desk gets the most!

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Beginner intermediate Blog Sign Up Login. Out of the Money Learn About 'Out of the Money' Options. The stock price — the price of the stock when the trade is executed The strike price — the price at which the option is bought or sold Option type — whether the option is a call or put option. Extrinsic Value - How It Relates to Out of the Money Extrinsic value is a slightly more difficult concept to understand when you are learning how to trade options.

It is because out of the money options are made up of time and volatility values. The standard deviation and bell curve as it relates to extrinsic value. Ready To Put YouR New Knowledge To Use?

selling otm put options

Try Trading on dough! Strike Price Volume Liquidity Part 3. Jul 2, beginner iv rank , implied volatility , high implied volatility , education , Tracy Algeo Tracy Algeo Comment.

Stock Volume Liquidity Part 2.

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