Options are exciting to trade for many reasons. They offer so many opportunities that the sheer volume of possibilities can be overwhelming. How can we go about finding the good ones?
To answer this, we need to think about what the sources of options profits are. What makes their prices move? The important factors are:
Stock price movement
Changing crowd expectations
The passage of time
When looking for option opportunities, we can choose to emphasize any of these.
If we look closer, we will see that the last factor, passage of time, is largely a function of the second one – crowd expectations. Here’s how: when expectations for movement are high, people pay more for options. When they pay more, there is more value in the options to start with, and therefore more of it to decay away over time. The higher the expectations were in the first place, the more the option writers will have, gotten paid for selling the options, and therefore the higher their potential profits.
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