Trade Your Way to Wealth – Earn Big Profits with No Risk, Low Risk, and Measured Risk Strategies : [PDF Download]

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“When we buy a stock, we have a great variety of choices in how to “insure” our position. We need not simply buy a put that is in the money. Instead, we could choose to accept some of the risk ourselves by purchasing an out-of the- money put, which would, of course, have a less expensive premium.

We also could choose an expiration of shorter or longer duration. Obviously, the farther out the expiration, the more expensive the premium would be since the longer time would entail more time value.

Table 4.4 sets out a chain of puts for Microsoft (MSFT) in mid-November at a time when the stock was trading at $29.40. An analysis of the options chain reveals that the more time we buy (the longer the “term” or our “insurance policy”), the more expensive the option will be.

We can also see that the in-the-money options are more expensive than the at-the-money options and the at-the-money options are more expensive than the out-of-the-money options.”

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