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“Everyone this is kirk here again at optionalphacom. Nand. This is the video tutorial for for option premiums again. We re going to go right into it and ntalk about of the basics behind option premiums.
We re going to go back to our rb s combo ncoupon example because i love rb s and this is a really easy way for you guys to understand nwhat. An option premium is let s just say again that we have this roast nbeef combo coupon for 399. That s what we can buy roast beef combo nright now at rb s if we go in there we ll give them the. Coupon nwe can buy.
It at. 399 let s say that the regular cost of this ncombo here is 699. For the example. I have this coupon in my possession.
And if ni want to sell it to you i could add a premium onto the price that i have for that option ncontract remember that this is just a contract right nhere and i could sell this coupon to you for 1. Now you d still actually be ahead of the ngame here because i d sell it to you for 1 you would go in and pay rb s. 399 so your ntotal investment would be..
499 and the price of it regularly is going to be 699. So you re nstill going to save. 2 by buying this coupon for me. If you couldn t find it yourself nfor example.
That s where the option premium comes into nplay. It s that extra price that you pay to acquire nthat option contract because i m not going to give this to you for free. It has value that s left in it there are two main factors that determine nan option contract premium and those two factors are intrinsic value or the value it has right nnow and then the extrinsic value the value that s remaining and time decay and volatility netcetera. We re going to go with an apple stock example nlike.
We ve been doing and let s look at some current options that are trading for napple now. I always use the last trade some people like to look at the bid and the nask and try to figure out what the in between trade is. But when i m looking at the price nof. An option.
I m always going to look at the last trade or what the premium is for nthat particular contract you can see i ve highlighted both of the npremiums for the calls. Which is located on the left side of this option pricing table nand. Then the puts..
Which is located on the right side. And you can see that there are many different nprices or many different premiums because they all relate to where the strike price nis in relation to the current. Market you can see that out of the money puts are ntrading for. 758 which is 758 and out of the money calls are trading for 595.
Which nis 595. These are all the different option pricing npremiums. This is what it cost to acquire any of these nstrike price calls and puts on apple. The premium isn t fixed and changes constantly premium.
You paid today is likely going to nbe higher or lower than premium. Yesterday or tomorrow going back to our example right here. These nare. The premiums as of this time.
I bet you if i pull up this pricing. Diagram nhere. Today and this a couple of days after i actually pulled this information when i m nmaking this video that these premiums would be wildly different and that s because..
The nmarket is always changing everything that is a premium yesterday could nbe higher or lower than tomorrow when we talk about premiums. We want to talk nabout and focus on the net debit or net credit again net debit means that you ve spent nmoney at the end of all of your transactions to enter the strategy this could be a debit spread an iron condor nanything like that a butterfly a ratio spread anything anything that you end up actually spending nmoney on is going to be a debit spread to make money on these types of option strategies. Nthere must be an increase in the value beyond the price that you paid before expiration that makes sense right if you buy a stock. The only way to make money nis that the value of the stock goes up it s the same thing with options if you pay a premium and you actually outlay nthat premium as a net debit.
Then to make money on that option trade you need the value nof those options to go up on the other hand. If you have a net credit nthis means that you begin with a credit of money to your account. And that to make money nin. This option strategy.
You have to have decay in value below. The price. You paid at nor before expiration again just like shorting. A stock.
When you nshort a stock you sell it high and you want the value to go lower. So you can buy it back nin the same thing applies with options trading. If you have a strategy where you actually nget money at the end of the day..
Whether that s a credit spread an iron condor naked puts nand calls. When you receive money or you receive that option premium. You can t get any more nthan that but you can keep all of it. If the value of those options decay and absolutely ncompletely disappear.
Before expiration. That s really the two big differences between noption premiums. You re going to have premiums that you outlay nand those are net debits and then premiums that you take in which are net credits. Again option premiums are very very simple they re simply the price that you pay to nenter into a contract or the price that you receive to sell a contract or an options contract.
Thank you for watching this video. If you guys enjoyed this video as always nright below this video are some links to some of the favorite social networks. So please nshare the video with any of your friends. ” .
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