There are a number of ways to profit in Stock option trading. It is possible to profit whether the market goes up, down or sideways. This makes options were the most flexible of all financial instruments.
Stock options can be traded using a number of simple and traditional methods. Many options traders use technical indicators to determine the direction of the underlying asset, which in this case would be a particular stock. Other traders choose to make their trading decisions based upon the price movements of a stock option itself. There is no right or wrong way to do this, simply effective or ineffective analysis.
One of the most important considerations when trading stock options is the valuation of options. This is important because you simply do not wish to buy an option at a price that is inflated over what it should be. Many an option trader has purchased a call option for a particular stock and watch that stock increase in value as the price of the option stood stagnant. This is very common if a trader overpays for an option.
Probably the most basic model of option valuation is known as the Black-Scholes model. This model is designed to give the trader the theoretical price that the option should be based on a number of factors such as the current price of the underlying stock, etc.
Other option valuation models include the binomial tree pricing model, Monte Carlo models, finite different models, finite element methods, etc.
It makes perfect sense that knowing what your stock options theoretical value is important to profitable stock option trading. This is especially important for short-term option traders as there is less time for an option to gain or lose value.
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