The second distinguishing characteristic of options is the so-called multidimensionality or (applicable to futures-style options in Russia) three-dimensionality.
When trading options, it is not enough to worry about the movement of the underlying asset and make decisions only based on the price chart of the underlying asset.. In addition to the dynamics of the futures price there are two more factors, affecting the financial result of our position.
Time
We are already familiar with the concept of time value and its non-linear decrease as the expiration date approaches.. Obviously, that the more time is left before expiration, the more expensive option due to the greater time value. Let's remember the insurance analogy: the longer the duration of our trip, the more expensive the insurance. It's the same story here.
Time affects the option price towards its decrease. The option loses a part of its premium every day.
Volatility
We will talk in great detail about this fundamental concept in options trading.. With increasing price fluctuations in the market the likelihood of “getting into the money” increases for purchased options and, respectively, prices also increase (Award) options.
Ie. volatility is the third factor, which affects the price of an option in the market and determines the financial result of an option position.
All three factors (price BA, time and volatility) affect our option position independently of each other, and sometimes in combination.
conclusions
For this reason option trading risk is more difficult to control and often more dangerous, than the risk on line instruments.
This does not make options more risky., than other financial instruments (with the right approach, rather the opposite), and doesn't optional Trading bad business, but all this, undoubtedly, makes it completely different compared to line tools.
If you want to be competent in this business, get ready for a new way of thinking.
You have entered the world of nonlinear instruments, so leave all your one-dimensional linear representations outside the door and embrace the new non-linear and multidimensional reality of options trading.
