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Options trading requires tools such as chains, Greeks, charts, and volatility studies to create strategies. Option chains provide strike prices, premiums, and market sentiment. Greeks determine the value of a contract, charts show outcomes under various conditions, and volatility studies help anticipate future movement. Advisory services and software are also available.
Successful options trading requires an arsenal of options trading tools. The different types of options trading tools are chains, Greeks, charts, and volatility studies. These four tools are the most important for creating the various option strategies. Without these tools, options trading is nothing more than gambling.
Option chains provide strike prices and option premiums. Premiums are the prices paid for the various strike prices. The strike price is the price at which the contract can be exorcised.
The spread, which is the difference between the bid and offer price, is also on the options chain. The volume and open interest of any individual option can provide the trader with insight into market sentiment. Option chains are sorted by expiration month.
Option greeks are needed to determine many factors affecting the value of the contract. Delta is used to calculate the value of the option in relation to the spot price movement of the underlying asset and gamma calculates the relationship of the delta to the underlying spot price movement. Vega calculates the value of the option in relation to the implied volatility. Theta is the effective loss in time value as the option nears expiration and rho determines the value in relation to interest rates. When put together, the Greeks determine the value of an option contract.
Options charts can be an invaluable asset in your arsenal of options trading tools. They are a visual tool and many traders respond well to visual interpretations of the trade. The charts will show the value and outcome of the trade under various market conditions. A change in implied volatility will alter the outcome of the trade.
The time until expiration affects the value of the option. The change in the price of the underlying asset is of primary importance. All these factors can be represented graphically.
Volatility studies should be reviewed before entering the option position. The rule of thumb is that you should buy low volatility and sell high volatility. You can plot implied volatility in relation to historical volatility and in relation to recent historical data. The options trader can get an idea of the general direction and anticipate future directional movement on the volatility chart. These different types of options trading tools are available from various sources.
Advisory services could also be considered an options trading tool. Consulting services are available on a subscription basis. Options trading software can be quite expensive to purchase. The software may be offered by options brokers for free with an account. Many software programs are freely available on various websites.
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