Friday, February 20, 2009

Investools review

I was looking at the Investools site the other day and came across there articles section. One article caught my attention. It deals with the terminology used in trading stock options. They mentioned five factors in how an option is priced. They are alpha, beta, gamma, vega and rho. Stock investing in general seems to use greek letters in it technical terminology. They are nothing to be intimidated by they are just symbols they use.

In Lehman's terms, A stock options price is determined by what the price of the stock is ( a $70 dollar stock's option will be more expensive than a $20 stock). That is what alpha stands for. Beta and vega are closely related. It basically is am sure of how volatile a stock is. The higher the volatility, the higher the price of the stock option. Makes sense, right? Theta si basically the time left until the option expires. The longer the option has until expiration the higher the option price. Rho dis definitely the most obscure of the terms. It has to do with the interest rates which are prevalent at the time. Not very influential.

So in summary, The higher the stock price, higher the stock volatility, and the longer time until expiration all make for a higher option price. The opposite is true for a cheap option price. There can be some good deals at both ends.

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