 Hey everybody, Lilo here from smartoptionseller.com. How's everyone doing today? It is Saturday October 2nd 2021 moving on in this year. Hey, welcome to another edition of our Saturday YouTube options Educational videos. If you've been with us for a while, you know that we like to give you some good free options trading information We go over strategies. We go over concepts So I'm here to help you become a better options trader. This is what we do every Saturday And so as you can see on your screen the topic for today is how our option prices Determined and we need to take a step back here because we usually usually talk about an options trading strategy a lot of times We talk about put options selling because that's what we do here at the smart option seller That's our bread and butter, but but sometimes we need to go back to basics because we have we have a lot of beginner Watchers here people that watch these videos and they don't really know a lot about options So they're we're talking about these options strategy. They don't even know what an option is So we need to step back every once in a while and and talk about the basics and what options are and how option prices are Determined so that's what we'll talk about today. We'll go over the concepts of what what goes into an option price What helps set the option price and how does it change over time? So? You know as we go down the list here as you know options contracts are just another form of investment Okay, they can be used in lieu of stock trading they can be used to take a bullish or bearish position You can be an option buyer an option seller, but regardless an option contract has its own price Just like every stock has its own price every option contract has its own price as well But option contracts are what we called Derivative investments and the reason why they're called derivative investments because of the options price is derived from other Sources, okay an options price gets its value from other sources Sorry about that had a little bit of a technical glitch there for a quick second So moving on we're talking about options prices and like I said, they're derived the options prices derived from other factors So let's go over what helps give it give an options its value Okay, when we talk about an options price options value options premium, they're all used Interchangeably okay an options price can also be called an options value options premium and In order to figure out what an options what an option contract is worth You have to take what we call these six Input prices these six numbers right here all get put into a Formula and then it spits out the options price So in order to figure out what an option is worth at any moment in time now Yes, you have the options traders on the floors of the option exchangers They're buying and selling you know get supply and demand for these things all day long But the option price itself is made up of other factors Okay, and and here's the six things right here that helps determine an options price You got the current stock price whatever stock that you're looking at the strike price of the option Okay, every option has a strike price and That the strike price is basically where you can contract yourself out to buy or sell that specific Option now if the stocks at a hundred dollars a share you can have a hundred dollar strike price a ninety dollar strike price 110 dollar strike price hundred and fifty dollar strike price a thirty dollar strike price There's all these different strike prices Okay, if you look at an option chain an option chain lists all the option contracts that are available For that specific stock and there's many months every option contract has an expiration date So there's all these different expiration dates one day out one week out one month out one year out two years out So you have strike prices expiration dates all different numbers, but regardless You have the current price of the stock you have the strike price You have any have how many days are left until the option expiration you have volatility levels volatility is How has the stock been fluctuating has it been erratic or has it been smooth? Okay, so that is what's called the volatility of the stock and and and it's it's a number It's an actual number that's get put it that gets put into the formula and you have dividend and interest rates So as I say up here these first four Input numbers are the most important that affects an options price options value options premium Whatever you want to say dividend and interest rates play a very small Part of giving an option is value So we really don't concentrate too much on dividend and interest rates So these four main things right here that help determine an options price And you take these numbers and these are all Easily found readily available anywhere on the internet or if you're if you have a you know a trading program A trading platform or through your broker you can find these four Things right here and actually the volatility levels I'll show you a good way to do that But you you can easily figure out what the the current stock price is You know what strike price you're looking at you know How many days until expiration are and you can find that as well And and I'll show you how to get a volatility level and these All these six things get put into an an option pricing formula And one of the most popular is what's called a black shoals model black shoals model is is based off of two gentlemen Black and shoals two different guys Those are their last names And they created this option pricing formula to help determine an options value And you can use an option calculator that will help you figure out the options price So you don't have to do the formula. It's a it's a crazy formula We don't have to worry about that because the calculator does it all for us So let's quickly go to an option calculator here This is from one of my favorite websites ivolatility.com if you've been with us for a while, you know I talk about ivolatility.com quite a bit So on their website and this is free a lot all of this information that I show you is all free stuff They they have their basic calculator That's all you need is your basic calculators to go to ivolatility.com and and open up the basic calculator So what you'll see is here We have Microsoft is just defaulted in there and Let's let's put an apple All you have to do is type in the symbol of apple and hit enter or go and it's going to bring up the closing price today's This was after after the close on October 1st. So yesterday Um Apple closed at the other day. So these are these are delayed prices. So this is this is One day delayed prices. Okay. So apple as of yesterday closed at $141 and 50 cents. So what you'll see this is an option calculator right here. This is the input section This is the output section. All we want to do is all we want to do is figure out What's the price of the call option and what is the price of the put option? Okay, and they the the call on the put will be based off of the input levels here now We talked about the six input levels. We have what's the the current price of the stock The strike price the expiration date. Now, let's change this expiration date. Let's go down to Let's look at December December expiration date, which is 77 days in the future. So What the model needs to know is how many days are are until expiration. So even though we use this quick Calendar, it's the 77 number which gets factored into the into the formula And we have volatility of 28.58. That's a percentage. That's 28.58 percent And here's your interest rates and here's the dividend amount 22 cents It just tells you this is all based on apple. The next dividend date was august 6th They paid out 22 cents. They paid out quarterly. So, you know, some of this stuff is just all extraneous You don't need to know this for the formula But but iVolatility gives you this information. So you got one two three four five six six numbers here in the inputs that will spit out the number here So when we I changed the expiration date, so let's hit calculate and the numbers over here change So an option calculator will quickly allow you to see what the value of the call and the put option is At any moment in time, okay, and using those six inputs now anytime you change One of these inputs the option value will change as well. So we go back to the document you can see Option prices are not static They will they fluctuate higher and lower throughout their life based on how all the inputs move each day And market forces of supply and demand Can also push option prices in in a certain direction If you have a lot of buyers that are trying to buy this one specific option contract Of course the the price is going to go up Or if there's a lot of sellers of that specific option contract, the price will go down But those six factors still are the biggest determinants of what How an option price Is determined so just imagine, you know during the trading day, let's say apple's price goes up to $145 now once I hit calculate Once I hit calculate you're going to see the call option value right here the second box right here call option value put option value When I hit calculate, you're going to see these two boxes right here change So let's hit calculate And you can see how they changed All right, so anytime something changes now, let's move the the days to expiration down to 40 days And we'll hit calculate And you'll see it once again these numbers change Okay, so all throughout the day the It's mostly the the stock price that's changing because if you have 40 days until expiration You know not until you turn the calendar down to 39 days Is is the is the pricing really going to change so on an intraday basis. It's mostly the Stock price that is the huge the biggest factor now we can change the volatility Let's say, you know during the pandemic when volatility went up to let's say a hundred percent, which is a huge huge number Watch how these values are going to change you're going to see both the call and the put option change now The stock price didn't change. It's the volatility that's changed. So let's hit calculate And you can see both values went up Greatly the stock price didn't move But it's the volatility that moved the option price itself when it's perceived that the stock's Going to have a lot bigger range higher lower That bumps up all the option prices regardless of whether the stock price changes So any any one of these things change it'll change the option prices So that's really, you know in a nutshell What happens to option prices or how they're calculated you have the inputs That goes into this formula behind the scenes. There's this black shells Mathematical formula that that's crunching these numbers and it gives us the value Of the call and the put so anytime one of these inputs change It's going to change these values so In the end it's really the stock price which is going to determine Where the option will settle on expiration day But until you get to expiration day all these other things have a hand and how the option price moves Okay, so if we go back to the document here Let's let's scroll down a little now Another thing that we like to do when we talk about option prices is we like to Basically classify The strike price you'll hear people say oh i'm buying an at the money call option Or i'm selling an out of the money put option. Well, what does that mean? And that's just and there's three terms There's at the money out of the money and in the money and it all describes Where the strike price lays in conjunction to where the current stock price is, okay So to make things easy what we The way to classify these things is if you have the stocks at a hundred dollars and you have a hundred dollar strike price That's that's the same right if you have the stock price and the strike prices are the same hundred dollars They're considered at the money It's at the money the hundred dollars is the at the money price. So a call and put option Uh to be at the money their strike prices is the same or roughly the same as the current stock price So we look at the examples here Um Let's go to the at the money a call and put option whose strike price is similar to the current stock price Is at the money a hundred dollar strike stock price and a hundred dollar strike price is at the money That's the same for both calls and puts Now the others the out of the money in the money. It's a little bit different So a call option whose strike price is lower Than the current stock price is what's called an in the money call option So you have a hundred dollar Stock price but the call option is a strike price of 90 That's called an in the money call option. Okay Now with a put option a put option whose strike price is higher than the current stock price That's an in the money put option. So if the stock price is at a hundred you have a hundred and ten dollar put option strike price That's in the money So it's good to know these different values and now let's look at the at the money information A call option strike price. That's higher than the current stock price is an out of the money option You got a hundred dollar stock Hundred and ten dollar call option is out of the money now with puts stock at a hundred The put strike is 90. That's an out of the money put option So these are these are just some lingo some terminology. That's good to know It it doesn't tell you how the option price gets created. It's just telling you Where it falls where the strike price falls in conjunction to the stock price So if we really want to go back to the option price, you know, the basic basis of this Video today is, you know, how our option price is determined It's really just these six factors and option prices are changing minute to minute All based on where the stock is moving during the day So if you're thinking that you're going to buy or sell An option contract and you think it's just going to the price is going to stay the same throughout the life of it Then you need to understand that's not how it works and option value fluctuates just like a stock price fluctuates So, you know, that's that's really about it. So sometimes we want to get back to basics here We want to understand what option prices are all about and then once you understand how option prices work You know, then you start getting into your strategies and you figure out, you know, how how the option prices move when you when you Engage in this certain strategy So it's just better to know things like if like I said, if you're driving a car And you understand how the engine works and the brake works and all the fluids work and how the pistons work and everything else the shocks shock absorbers work The more you know about something the more You know, the more you can understand how it works the same thing with options as long as you if you can understand All the moving parts you can become a smarter trader now. I wanted to show you going back to the i-volatility here Um, we have this volatility number now sometimes that can be confusing to people The the current stock price the strike price in the day's expiration are widely known The volatility is a little bit of a of a different concept. It could be confusing to some people Volatility is just a measure of how Erratic a stock has been over a certain period of time. Okay, it gets measured That erraticness is measured and and is turned into an actual number and it gets put into the the formula and then in order to What what the option traders do is they they take that historical information of where the stock has been and they Projected into the future where they think the stock is going to be or how it's how the stock is going to move We're not talking whether the stock's going higher or lower We're talking about how erratic it's going to be And that is what's called the volatility number now. You can also go to ivolatility.com And you can pull up their volatility information if you type in you're typing Apple again, it'll bring up the volatility information and I like to use this chart right here. This is a great handy little tool It's the chart. This is a volatility chart. It tells you how erratic this a stock has been over time This is not a price chart of apple. This is not telling you the price of apple This is telling you it's historic. It's it's a volatility Levels and where the volatility of apple has fluctuated over a period of one year's time Now we have two lines. We have a historical volatility is the blue line that tells you That measures the past movements of apple. So where has apple been? How has it fluctuated the blue line measures Its volatility how erratic it's been the screen line is what's called the implied volatility measure That's the option traders best guess as to where or how volatile apple will be in the future And for the most part both lines track each other Okay, so you can see volatility of apple or the erraticness of apple has gone down over time This is going back to last october 2020 Still things are pretty erratic stocks are moving higher and lower large interday ranges That means it's been erratic, but as we've gone through the pandemic And if you look at a chart of apple you will see apple's trading ranges have gotten smaller and smaller Over the last year or so. So that means it's volatility or its range of pricing or its erratic Erraticness has gone down and you can we can quantify that by looking over here Here's the percentages. So right now the volatility of apple is somewhere between, you know, 20 and 30 percent So that we use 25 percent as as the mean average level whereas back a year ago it was, you know, close to 50 percent It's it's it's it's been halved It's it's dropped in half over the last year and then you take this 25 percent number and you put it back into the calculator 25 percent And we hit calculate and you can see that What happened to the numbers here? Okay, so here's the values right there. All right, so Let's let let's just go to microsoft and see what happens and you the i-volatility has its own measure of volatility So they'll they'll default this number in here for you the volatility number But you can put any number you want in there if you think you know what that volatility is too low I think the volatility should be more like 30 percent put it in there and you'll see how the numbers change Calculate so it changed a little bit. So it's up to you to decide what volatility level should be in this box And you can let it default to what i-volatility puts in there. They're pretty accurate. They have, you know, smart people there But it's up to you. All right, so that's pretty much it on how Option prices get their values, right and all day long the option prices change based on The stock price moving around and then you know the number of days to expiration So if you here's just some information for you to keep you more informed On how to become a smarter more profitable options trader And you can use this information and use the volatility charts to help you gauge where things are All right. Well, you know, that's it for this short little lesson about 20 minutes long Let's go quickly to our website smartoptionseller.com You know, we're big put option sellers. That's what we do That's our bread and butter If you don't know anything about put option selling go to our website download our free copy of put selling basics Go to our website here. Click put some basics. You can put your name and email address right here. We'll send you a free copy Okay, uh what we do here at smart option seller We sell put options. We sell put option spreads. We're big option sellers These are our two newsletters right here and we also have our one on one coaching If you want to engage with us or actually me We sit down for an hour and we'll talk about options trading and I can teach you how to become a better options trader So, all right, that's all for me today. I hope uh, this this little video has been helpful to you in this youtube video Don't forget to hit that subscribe button in the bottom right here in corner of the video Give me a thumbs up if you like this Leave me a comment Send me an email And I will always answer your questions can't give out personal investment advice But I can certainly help answer questions about options trading. All right, so that's all for me today Uh, I hope everyone has a great weekend and a great week ahead. This is lilo signing off