The Skinny on Options: Abstract Applications

Deconstructing Option Prices

The Skinny on Options: Abstract Applications

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

At their core, option prices can be broken down into two components: intrinsic value and extrinsic value. And of the variables impacting the extrinsic value of an option’s price, time and volatility are clearly the most potent players on a day-to-day basis. Interestingly enough, the entire tastytrade philosophy is built off of these two variables.

With time, we like to enter trades around 45 DTE, trade duration over direction, and handle our winning trades and losing trades very differently. With volatility, the raw implied volatility, implied volatility rank, and changing levels of volatility are all front and center in our portfolios.

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