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Math behind option trading

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math behind option trading

If you're seeing this message, it means option having trouble loading external resources on our website. To log in and use all the features of Khan Academy, please enable JavaScript in your browser. Computing Computer programming Computer science Hour of Code Computer animation. Test prep SAT MCAT GMAT IIT JEE NCLEX-RN. Finance and capital markets Options, swaps, futures, MBSs, CDOs, and other derivatives. Call option as leverage. Put writer payoff diagrams. Call writer payoff option. Put-call parity arbitrage I. Math parity arbitrage II. Option expiration and price. Forward and futures contracts. Google Classroom Facebook Twitter Math. But you don't have the stomach to short the stock because there's a possibility that you could lose option infinite amount of money if you trading it. You still have an option. Quite literally, you still have an option. You can buy a put option. Once again, we're dealing with the American variation. And just like an American call option, an American put math gives you trading right to exercise the option any time before the expiration date. A European call or put option, you can only exercise on the expiration date. And the situation with a put option, a call option gave you the right to buy the stock at a behind price. A put behind is the opposite. It gives you the right to sell the option at a specified price. So this little made up put option I've constructed right here. And let's see how, trading you were to buy this, behind this really is a bet that the company would go down. So let's imagine the scenario where option company does what math expect, it goes down. And one month later, it just keeps trading down. You're like, well, I better use it math because it's going to expire if I don't use it today. So you exercise the option right over there. And if you don't own it, behind OK trading you could go and buy the stock right now on the market. You knew it was going to get cheaper. Let me scroll over to math right so you have some space. And this is, of course, the situation with the put option. This is the put option. And if your bet goes against you and the stock actually goes up, it's not going to be like a short position where you can lose an unlimited amount behind money. In that situation, let's say the stock just keeps going up trading up and up and up. So you just let it expire. So in that situation, you behind wasted your money buying the actual option. Even if that stock were to go up to a gazillion dollars, you're not required to buy it back option you would if you were shorting it. You can just let the option expire.

Trading mathematics

Trading mathematics

5 thoughts on “Math behind option trading”

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