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- Selling Options For Income: 5 Surprises That Can Help You
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During this conversation, your advisor will want to learn about your financial goals, time horizon, and general tolerance for risk. You’ll also discuss things like your current accounts and cash flow issues, and your current assets and liabilities.
Selling Options For Income: 5 Surprises That Can Help You
If you plot the implied volatilities (IV) against the strike prices, you might get the following U-shaped curve resembling a smile. Hence, this particular volatility skew pattern is better known as the volatility smile.
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Implied volatility can be determined by using an option pricing model. It is the only factor in the model that isn't directly observable in the market rather, the option pricing model uses the other factors to determine implied volatility and call premium. The Black-Scholes Model , the most widely used and well-known options pricing model, factors in current stock price, options strike price, time until expiration (denoted as a percent of a year), and risk-free interest rates. The Black-Scholes Model is quick in calculating any number of option prices. However, it cannot accurately calculate American options, since it only considers the price at an option's expiration date.
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Implied volatility is one of the deciding factors in the pricing of options. Options, which give the buyer the opportunity to buy or sell an asset at a specific price during a pre-determined period of time, have higher premiums with high levels of implied volatility, and vice versa. Implied volatility approximates the future value of an option, and the option's current value takes this into consideration. Implied volatility is an important thing for investors to pay attention to if the price of the option rises, but the buyer owns a call price on the original, lower price, or strike price , that means he or she can pay the lower price and immediately turn the asset around and sell it at the higher price.
He said those spreads, which compare yields on riskier debt against safer debt, have room to tighten further, as they are still about 95 to 55 basis points wider than where they stood two years ago.