6 Steps to a Trading Decision

1. State your Forecast

– important to be specific about price of stock and time frame
e.g. XXX stock will rise from $10 to $15 in 20 days. Today is 40 days to expiration.

2. Calculate the Implied Volatility

– volatility percentage in the option pricing formula
– Stock price
– Strike price
– Dividends
– Interest Rates
– Days to expiration
– Volatility

OIC Option Pricing Calculator

3. Estimate the option price assuming forecast is correct

4. Estimate the option price assuming forecast is wrong

5. Measure results alternative on a percentage basis and analyze the risk/reward of each option

6. Using the option chosen from your analysis, determine the number of options to purchase*Credits: CBOE Options Institute Online Learning Center – Trading Strategies

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