Annex B - Behavior of Option Prices until Expiry
The analysis of the strategies in this book relates to only two points in time: the date of purchasing the strategy (Date A) and the expiry date of the strategy (Date B).
However, strategies have a "life" in between these two dates.
The value of each of the strategies can increase or decrease during the period, resulting in our making a profit or a loss.
The strategy components can be sold at any time of the stock exchange in many cases, it is recommended to do so. This is because sometimes the market gives the strategy great value, making it worthwhile realizing the profit, and on occasion, the market "hits" the strategy and it is desirable to cut losses.
The analysis of the behavior of the strategies between the dates (especially their options component) is more suited to an advanced book and it’s possible that this will be discussed in more detail in the future.
Within the framework of this book, we will only say that the prices of the options making up the strategy were affected during the period by the following factors:
- Level of the DJ Index.
- Level of uncertainty regarding the way in which the DJ Index can be expected to behave in the future. This is expressed in the movements of the DJ Index. The more volatile the index, the higher option prices are, both Put and Call.
- Changes in interest rates in the economy.
Practice is the name of the game
For the beginning reader we suggest virtual "dry" practicing the prices of a number of strategies, over a period of a few months.
It is easy to purchase "on paper" 2-3 strategies and follow the daily changes in prices over a few months. There are a number of banks which offer this service.