Investors who are just starting out in the stock market often put the majority of their focus on trading individual shares, but that isn’t the only way to profit from ups and downs in stock price. As investors get more comfortable with the choices available, many start trading options.

Stock Option Basics

Stock options permit the holder to buy or sell the underlying stock for a pre-determined amount, known as the strike price.

American-style options can be exercised up to their expiration date, making it possible to take advantage of changes in share prices without a large initial outlay of cash. This reduces risk for the option holder, whose maximum loss is the premium paid for the option.

Each option contract typically covers 100 shares of the underlying equity. That means if the per-share premium is $0.25, the total premium comes to $25.

Of course, premiums are higher for options that are more likely to be profitable, as these present a higher risk of financial loss for the contract writer.

There are two types of options available to you. Call options give you the opportunity to buy shares at a pre-determined price. You have the right to “call” the shares away from the option writer.

Put options allow you to sell the underlying stock at a pre-determined price. You have the right to “put” the shares to the option writer.

It can be tricky to find balance between the amount you are willing to pay for an option and the probability that your options will be worth exercising.

As you research available options and make decisions about how much you are willing to invest – and possibly lose – you will come across financial analysis terms known collectively as the Greeks.

The Greeks refer to measurement of specific factors that impact risks associated with particular options. As with any investment, the higher the risk, the higher the potential reward.

The Greeks

The four most common terms you will hear in reference to options are delta, gamma, theta, and vega. They reference the following factors in risk assessment:

• Delta – Measures how the movement of underlying stock prices affect option prices
• Gamma – Measures the exposure of the option delta against increases or decreases in the underlying stock price
• Theta – Measures how the option price is impacted by the passage of time
• Vega – Measures the impact of changes in volatility of the underlying stock on the price of options

What Is Options Vega?

A stock’s volatility is the amount it changes – both up and down – in a given period of time. If the range of highs and lows is quite large, the stock is considered highly volatile.

If the range is narrow, you can count on share prices to remain fairly steady.

Investors who don’t like a lot of excitement tend to stick with low-volatility stocks, while those interested in high-risk/high-reward opportunities are more likely to consider stocks with high volatility.

To put volatility into perspective, these are some of the most volatile stocks on the S&P 500 over the last three years:

• Nektar Therapeutics – Monthly Price Volatility 29.80
• Twitter Inc. – Monthly Price Volatility 14.27
• Nvidia Corp. – Monthly Price Volatility 14.13

These are some of the least volatile stocks on the S&P 500 over the last three years:

• Twenty-First Century Fox Inc. Class A – Monthly Price Volatility 8.13
• Walmart Inc. – Monthly Price Volatility 5.39
• Western Union Co. – Monthly Price Volatility 4.40

Options contract writers consider the volatility of stock prices when determining the cost of the option. After all, if the underlying stock is highly volatile, there is a greater risk that the options will be exercised.

Implied Volatility (IV) is the predicted volatility of the underlying stock price over the period covered by the options contract.

This is generally determined based on a combination of factors that include historical price changes, recent price changes, and expected price movement.

A stock with low IV is expected to remain steady from a pricing perspective, while a stock with high IV is expected to move up or down – or both – before the option expires.

IV is expressed as a percentage, so a stock with an IV of 20 percent is expected to be priced within 20 percent of its current value one year from now.

The options vega is the amount an option premium changes for every one percent change in IV. This figure is noted as a raw number, not a percentage.

How Options Vega Affects Options Pricing

When options are close to their expiration date, the vega is negative. That means lower premium pricing.

As options get closer to their expiration date, there is less uncertainty about whether and how the stock’s price will change.

Conversely, the option vega is positive when there is more time before the expiration date, and there is a relationship between longer contracts and an increase in the option vega.

More time means higher likelihood of movement in the stock price. It is harder to predict what will happen in the market over lengthy periods of time. This increases risk for contract writers – and potential reward for options holders – so writers can attract buyers who are willing to pay higher premiums.

Remember, American options can be exercised at any time before the expiration date, so contract writers take on quite a bit of risk when the underlying stock is highly volatile.

European options can only be exercised on the expiration date, which changes the type of risk contract writers incur. Premiums for specific options change as the underlying stock price fluctuates, and in many cases, options are traded several times before the expiration date.

How Options Vega Works Example

This is an example of how options vega affects options pricing:

Stock EFG is trading at $46 in June, and $50 call options expiring in July are available for $2.

The volatility of the underlying EFG stock is 25 percent, and the option vega is 0.15.

What if EFG’s underlying volatility increases to 26 percent?

The additional one percent means an increase in premium equal to the option vega, or $0.15, for a total of $2.15.

Alternatively, if the volatility decreases to 24 percent, the premium is likely to go down by $0.15 to $1.85.

Ready To Trade Using Options Vega?

Trading options can be a good way to build wealth without risking large amounts of cash. The key is understanding how premium prices are determined, so you know when you are getting a good deal.

Another important factor is the broker you select. Serious options traders who care about implied volatility, vega, delta, gamma, and theta require options trading platforms that support cutting-edge tools to view risk graphs, fast and accurate order execution to ensure best fills, and affordable commissions.

tastyworks and thinkorswim feature among the very best options trading platforms. Both are world class in cater to stock, options, and futures traders.

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The article What Is Options Vega? was originally posted on Investormint

Investors who prefer a less-risky strategy than betting on a hot stock tip put effort into research. They examine each company’s financials, and review the challenges and opportunities facing the particular business – as well as the industry in general.

There is a seemingly endless array of analysts and market researchers willing to offer opinions on the future of specific companies, industries, and the market as a whole. It can be difficult for an average investor to sift through all of the material and pull out the most reliable – especially when data conflicts.

A deep understanding of the terms analysts use and how they make their recommendations is the best way to separate useful information from amateur opinions.

One of the most frequently misunderstood terms is “overweight”. When analysts describe stocks as overweight, it is common for investors to take that as a recommendation to buy.

However, the term overweight doesn’t always mean buy – and if it does, more information is needed before you can be sure exactly how much to invest in a given security.

This guide offers insight into when analysts use the term “overweight stock”, as well as details on additional information you should review before making a trade.

What Does an Overweight Stock Rating Mean?

At its most basic, an overweight rating means that the analyst believes a stock will increase in value over the coming months.

It generally correlates to a “buy” rating, as the analyst is saying it is possible share prices will outperform industry peers and/or the market as a whole.

Analysts using the term overweight are typically looking at a six – twelve-month timeframe, though in certain cases the timeframe may be shorter or longer.

They may rate a given security as overweight for any number of reasons. Some of the data they look at include the following:

• Positive news from the company or industry
• Strong earnings reports
• Outperforming earnings per share and revenues estimates
• How the company’s financial statements compare to competitors

It is important to note that the term “overweight” used in reference to a stock rating is an entirely different concept from the term “overweight” used in reference to a portfolio.

A portfolio that is overweight in a certain type of asset may be relying too heavily on that asset. Ideally, portfolios contain a balanced mix of assets that reflect financial goals and the investor’s tolerance for risk.

If you invest in an index fund, you might hear that a company is “overweight” in that fund. That means the fund has more of a particular company’s shares than does the underlying index. For example, as of September 30, 2018, Apple made up 4.21% of the S&P 500 index.

A variety of firms manage index funds that track the S&P 500, including Vanguard, Schwab, Fidelity, and T. Rowe Price.

If any of the index fund managers elected to increase Apple holdings above 4.21 percent, the fund could be described as “overweight” in Apple. Again, this use of the term overweight is not related to overweight in the context of a stock rating.

Why Overweight Stock Ratings Can Be Confusing

One of the issues individual investors face when choosing stocks for their portfolios is the varied terms analysts use to make recommendations. Analysts are employed by private investment firms, and there is no requirement that they use consistent language.

You might hear a stock rated as “buy“, “overweight“, “outperform“, “accumulate“, or “add“. All of these are positive ratings. Exactly how positive depends on context, as well as whether the analyst is working with a three-tier or five-tier rating system.

Adding to the complexity of defining “overweight” is the fact that analysts may also use this term to describe entire industries. For example, an analyst who believes the technology sector is poised for growth in the next six – twelve months might describe the sector as overweight.

Does an Overweight Stock Rating Mean Buy or Sell?

The bottom line is that an overweight rating is a positive sign that a given security could be a good investment.

However, a single analyst’s positive rating – and even multiple analysts’ positive ratings – aren’t enough to make a buy decision.

After all, analysts often disagree. These ratings are pieces of a larger puzzle, and you need to see the full picture before handing over your hard-earned cash.

Before investing in any business, review analyst ratings to get a sense of which types of businesses might best meet your financial goals. This is a good starting point, but remember some analysts are pursuing their own agendas – and it is unlikely that their agendas align with yours.

Next, collect additional information that offers critical insight into the companies’ prospects. Examples of useful information include the following:

• Past price performance
• Earnings reports
• Profit margins
• Amount of debt compared to assets
• Dividend history

You are looking for consistent revenue growth over time, as well as a reasonable amount of profit. You can calculate this by determining the difference between revenue and expenses, thought admittedly it gets quite a bit more complex if you want to factor in taxes, or one time charges – such as building purchases.

Overweight Stock Ratings Are Not Enough

Finally, make sure you have a high-level understanding of the business you are investing in. How does it make money now, and how does it plan to make money in the future? Do you believe this company can change and adapt with changing consumer needs?

For example, a business that has been unwilling or unable to open digital service channels and e-commerce options may be less likely to be successful in coming years.

Stocks like Netflix and Alphabet (aka Google) became extraordinarily successful because they were at the cutting-edge of new technology shifts. Is the company you are considering at the cutting-edge or a laggard?

Ready To Start Investing In Overweight Stocks?

To begin investing in stocks that are rated highly or simply to conduct more due diligence on stocks that may be worth of your hard-earned capital, open a brokerage account at a top tier firm.

Top stock brokers, like tastyworks feature a wealth of tools and screener to help you select hidden gems that may otherwise go undiscovered.

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The article What Does Overweight Stock Rating Mean? was originally posted on Investormint

Experienced traders know it is possible to turn a profit, even when the selected company’s shares lose value. Purchasing options to buy (call) or sell (put) shares in the future at a pre-determined price comes with risk – but when the bet pays off, there may be substantial rewards.

Option Assignment: The Basics

An options transaction begins with a contract. The writer of the contract agrees to buy or sell shares at an agreed-upon price, known as the strike price, within a specified timeframe.

In the US, the holder of the contract can exercise the option to buy or sell stock at the strike price any time, up to and including the contract’s expiration date. European options can only be exercised on the on the contract’s expiration date.

Options contracts are typically written in 100 share increments, so if the premium fee is $0.30 per share, one option (100 shares) would cost the contract holder $30.

Investors who hold options contracts are not required to exercise them. If they choose not to, they lose the per-share premium fee paid for the contract.

Risks & Benefits Of Options

Investors who believe that stock prices will increase can purchase options to buy shares at a specific price.

If share prices go up as expected, the contract holder has an opportunity to purchase them at the agreed upon rate, which is lower than market value. The contract itself can also be sold to other investors who want the option to buy at the option price.

Investors who believe share prices will decrease can purchase options to sell (or put) the shares to the contract writer.

Assuming the stock price does, in fact, go down, the contract holder profits by selling shares for more than market value.

Alternatively, if the contract holder does not already own the shares, it is possible to sell the contract itself. It has value to other investors who own the shares and want to reduce their losses when the value drops.

Assigning options is the process through which options buyers exercise their rights to buy or sell stock at the price agreed upon in the option contract. The transaction is “assigned” or matched to a contract writer, and the contract writer must meet the terms of the option agreement.

While the option contract buyer is not required to exercise options, the option contract writer is obligated to meet the conditions outlined in the agreement.

Short Call Option Assignment

Investors with options to buy shares at a pre-determined strike price own call options. They can buy or “call” shares away from the contract writer if they choose to exercise their options.

Call Option Assignment Example

Shares of XYZ Co. are currently selling at $50 per share. You believe the price will increase to $60 per share within a month. You purchase an option that allows you to buy 100 shares at $55 within the next month. This costs you $0.25 per share, for a total of $25.

If the share price doesn’t go above the strike price before your option expires, your loss is $25. However, if it does rise beyond $55, your option is “in the money”.

Say share prices increase to $58, and you choose to exercise your options. The transaction is automatically assigned to an option contract writer, and you have an opportunity to call or buy 100 shares of XYZ Co. from that writer at $55 per share.

Your profit is $3 per share or $300 (for every 1 call contract purchased), less the $25 premium and any transaction fees. To lower your transaction costs, consider tastyworks which charges $0 commissions on closing stock and options trades (*clearing fees still apply).

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Option holders sometimes choose to exercise their buying rights even if share prices don’t increase as expected when there is a dividend coming up. Of course, this only makes sense when the amount of the dividend is enough to offset fees and still turn a profit for the option contract holder.

Short Put Option Assignment

A contract to sell shares at a specific strike price is referred to as a put option. These are typically used when investors believe shares of a specific company will go down, and they want to protect existing assets or profit from this downturn in the stock’s price.

Put Option Assignment Example

It works like this: Shares of XYZ Co. are currently selling at $50 per share, but you believe the price is going to drop by 20 percent. You purchase an option to sell 100 shares at $45 within the next month, which is the price you originally paid when you bought the shares. You pay a premium of $0.25 per share, or $25 (for each option contract).

As expected, XYZ Co. experiences a dramatic loss, and shares drop to $38 each. Since you already own these shares, along with a put option, you can “put” them to an options contract holder.

Your transaction is assigned to a contract holder automatically, and the holder must purchase your shares at $45 each. This mitigates the loss you might have otherwise experienced when your stock lost value.

Even if you don’t already own the shares, you can still profit from a put option. You can buy the shares at their current price of $38, then sell them by exercising your option to sell at $45, or you can sell the contract itself. Others who own XYZ Co. shares are also looking for ways to offset some of their losses.

Option Assignment Can Be Good!

Selling call and put option contracts comes with significant risk, even for the most seasoned investors.

The upside is that when options expire without being exercised, contract writers profit from the premium fees collected. The downside for call contract writers is the potential loss of profit if share prices increase substantially and your options are assigned.

Writing put contracts is slightly less risky, in that contract writers can hold the purchased shares in hopes that prices eventually recover.

Those who hold options contracts risk the loss of their premium fees, but this can be a worthwhile gamble for a number of reasons.

Options can be used to protect a portfolio from the standard ups and downs of the market – a useful feature for investors who have short-term financial goals.

They can also offer an opportunity to speculate on future market changes with limited risk, as the only loss is the loss of premium fees.

To get started trading options, view risk graphs, and access free options trading tutorials, check out thinkorswim.

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The article What Is Option Assignment? was originally posted on Investormint