If a contract trades between 0 and 100, and it can only expire at 0 or 100, then you know that it either expire at 0 or 100.
You know where is the bottom, and you know where is the top, and you know where is the worst: neither here nor there. You can buy and you can sell.
If you buy something at 1000 and sell it at 1100, you make 100. If you buy something at 100 and sell it at 200, you make 100. 100 is 100. But if you buy at 1000 you risk 1000.
When you can know the time to expiry, the underlying index, the strike, you can gauge how far it is to finishing line, how much time is left, whether it is probable that it can move by a certain amount within that given time.
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I bid high and I ask low. |