Learn How to Trade Options (Collection)

2. Option Selection

What Is a Cheap Option?

Everyone has their own idea about when something is cheap. On a superficial level, something that costs $1 is cheap and something that costs $100 is expensive. However, it’s not actually the number of dollars in the purchase price that makes an item cheap or expensive, but rather the amount the purchase price exceeds the intrinsic worth of the item. Paying up to own an item becomes worthwhile only when ownership provides the opportunity for future profit.

What does this have to do with options? Well, every option has a price that represents a combination of its intrinsic value plus some extra value. In the options market, this extra value is called time value. As mentioned in Chapter 1, “Introduction ...